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# Circular A

- 4
September 17, 2003

TO THE HEADS OF EXECUTIVE AGENCIES AND ESTABLISHMEN TS
Subject: Regulatory Analysis

A. Introduction B. The Need for Federal Regulatory Action C. Alternative Regulatory Approaches D. Analytical Approaches E. Identifying and Measuring Benefits and Costs F. Specialized Analytical Requirements G. Accounting Statement H. Effective Date
This Circular provides the Office of Management and Budget’s (OMB's) guidance to Federal agencies on the development of regulatory analysis as required under Section 6(a)(3)(c) of Executive O rder12866, "Regulatory Planning and Review," the Regulatory Right-to-Know Act, and a variety of related authorities. The Circular also provides guidance to agencies on the regulatory accounting statements that are required under the R egulatory Right to-Know Act.
This Circular refines OMB's "best practices" docume nt of 1996 ( http://www.whitehouse.gov/omb/inforeg/riaguide.html which was issued as a guidance in 2000 ( http://www.whitehouse.gov/omb/memoranda/m00 2001 ( http://www.whitehouse.gov/omb/memoranda/m01-23.html ). It replaces both the 1996 "best practices" and the 2000 guidance.
In developing this Circular, OMB first developed a draft that was subject to public comment, interagency review, and peer review. Peer reviewers included Cass Sunstein, University of Chicago; Lester Lave, Carne gie Mellon University; Milton C. Weinstein and James K. Hammitt of the Harvard Sc hool of Public Health; Kerry University; Jonathan Weiner, Duke University Law School; Douglas K. Owens, Stanford University; and W. Kip 

### About OMBlog The Budget Management Regulation & Information Policy Legislative Information 

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- 4Viscusi, Harvard Law School. Although these individ uals submitted comments, OMB is solely responsible for the final

content of this Circular.

A. Introduction This Circular is designed to assist analysts in the regulatory agencies by defining good regulatory an alysis, called either "regulatory analysis" or "analysis" for brev ity, and standardizing the way benefits and costs o f Federal regulatory actions are measured and reported. Executive Order 12866 requires agencies to conduct a regulatory ana lysis for economically significant regulatory actions as defi ned by Section 3(f)(1). This requirement applies to rulemakings that rescind or modify existing rules as well as to rule makings that establish new requirements.
The Need for Analysis of Proposed Regulatory Action s 1
Regulatory analysis is a tool regulatory agencies u se to anticipate and evaluate the likely consequenc es of rules. It provides a formal way of organizing the evidence on the key effects, good and bad, of the various alte rnatives that should be considered in developing regulations. The motivation is to (1) learn if the benefits of an a ction are likely to justify the costs or (2) discover which of various possible alternatives would be the most cost-effect ive.
A good regulatory analysis is designed to inform th e public and other parts of the Government (as well as the agency conducting the analysis) of the effects of alternat ive actions. Regulatory analysis sometimes will sho w that a proposed action is misguided, but it can also demonstrate th at well-conceived actions are reasonable and justif ied.
Benefit-cost analysis is a primary tool used for re gulatory analysis. 2Where all benefits and costs can be quantified and expressed in monetary units, benefit-cost analysis provides decision makers with a clear indication ofthe most efficient alternative, that is, the alternative that generate s the largest net benefits to society (ignoring dis tributional effects). This is useful information for decision makers and the p ublic to receive, even when economic efficiency is not the only or the overriding public policy objective.
It will not always be possible to express in moneta ry units all of the important benefits and costs. W hen it is not, the most efficient alternative will not necessarily be the one with the largest quantified and monetized n et-benefit estimate. In such cases, you should exercise professional jud gment in determining how important the non-quantifi ed benefits or costs may be in the context of the overall analysis . If the non-quantified benefits and costs are like ly to be important, you should carry out a "threshold" analysis to eval uate their significance. Threshold or "break-even" analysis answers the question, "How small could the value of the non -quantified benefits be (or how large would the val ue of the nonquantified costs need to be) before the rule would yield zero net benefits?" In addition to threshold analysis you should indicate, where possible, which non-quantified effe cts are most important and why.
Key Elements of a Regulatory Analysis
A good regulatory analysis should include the follo wing three basic elements: (1) a statement of the n eed for the proposed action, (2) an examination of alternative approaches, and (3) an evaluation of the benefits a nd costs— quantitative and qualitative—of the proposed action and the main alternatives identified by the analys is.
To evaluate properly the benefits and costs of regu lations and their alternatives, you will need to do the following:
Explain how the actions required by the rule are li nked to the expected benefits. For example, indicat e how additional safety equipment will reduce safety risk s. A similar analysis should be done for each of th e alternatives. • 

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- 4Identify a baseline. Benefits and costs are defined in comparison with a clearly stated alternative. T his normally

will be a "no action" baseline: what the world will be like if the proposed rule is not adopted. Compa risons to a "next best" alternative are also especially useful. •

Identify the expected undesirable side-effects and ancillary benefits of the proposed regulatory actio n and the alternatives. These should be added to the direct b enefits and costs as appropriate. •

With this information, you should be able to assess quantitatively the benefits and costs of the propo sed rule and its alternatives. A complete regulatory analysis includ es a discussion of non-quantified as well as quanti fied benefits and costs. A non-quantified outcome is a benefit or cos t that has not been quantified or monetized in the analysis. When there are important non-monetary values at stake, y ou should also identify them in your analysis so po licymakers can compare them with the monetary benefits and costs. When your analysis is complete, you should present a summary of the benefit and cost estimates for each alternat ive, including the qualitative and non-monetized fa ctors affected by the rule, so that readers can evaluate them.
As you design, execute, and write your regulatory a nalysis, you should seek out the opinions of those who will be affected by the regulation as well as the views of those individuals and organizations who may not be affected but have special knowledge or insight into the regulato ry issues. Consultation can be useful in ensuring t hat your analysis addresses all of the relevant issues and that you h ave access to all pertinent data. Early consultatio n can be especially helpful. You should not limit consultation to the f inal stages of your analytical efforts.
You will find that you cannot conduct a good regula tory analysis according to a formula. Conducting hi gh-quality analysis requires competent professional judgment. Different regulations may call for different emphas es in the analysis, depending on the nature and complexity ofthe regulatory issues and the sensitivity of the b enefit and cost estimates to the key assumptions.
A good analysis is transparent. It should be possib le for a qualified third party reading the report t o see clearly how you arrived at your estimates and conclusions. For tran sparency's sake, you should state in your report wh at assumptions were used, such as the time horizon for the analysi s and the discount rates applied to future benefits and costs. It is usually necessary to provide a sensitivity analysis to reveal whether, and to what extent, the results of the analysis are sensitive to plausible changes in the main assumpti ons and numeric inputs.
A good analysis provides specific references to all sources of data, appendices with documentation of models (where necessary), and the results of formal sensitivity a nd other uncertainty analyses. Your analysis should also have an executive summary, including a standardized account ing statement.
B. The Need for Federal Regulatory Action Before recommending Federal regulatory action, an a gency must demonstrate that the proposed action is necessary. If the regulatory intervention results from a statu tory or judicial directive, you should describe the specific authority for your action, the extent of discretion available to you, and the regulatory instruments you might use. Executive Order 12866 states that "Federal agencies should promulga te only such regulations as are required by law, ar e necessary to interpret the law, or are made necessary by compell ing need, such as material failures of private mark ets to protect or improve the health and safety of the public, the en vironment, or the well being of the American people ... ."
Executive Order 12866 also states that "Each agencyshall identify the problem that it intends to addr ess (including, where applicable, the failures of private markets o r public institutions that warrant new agency actio n) as well as assess the significance of that problem." Thus, you should try to explain whether the action is intend ed to address a significant market failure or to meet some other co mpelling public need such as improving governmental processes or promoting intangible values such as distributional fairness or privacy. If the regulation is designed to correct a significant market failure, you should describe the failure both qualitatively and (where feasible) qu antitatively. You 

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- 4should show that a government intervention is likel y to do more good than harm. For other intervention s, you should

also provide a demonstration of compelling social p urpose and the likelihood of effective action. Alth ough intangible rationales do not need to be quantified, the analys is should present and evaluate the strengths and li mitations of the relevant arguments for these intangible values.
Market Failure or Other Social Purpose
The major types of market failure include: external ity, market power, and inadequate or asymmetric inf ormation. Correcting market failures is a reason for regulati on, but it is not the only reason. Other possible j ustifications include improving the functioning of government, removing d istributional unfairness, or promoting privacy and personal freedom.
1. Externality, common property resource and publicgood
An externality occurs when one party's actions impo se uncompensated benefits or costs on another party

. Environmental problems are a classic case of extern ality. For example, the smoke from a factory may ad versely affect the health of local residents while soiling the pro perty in nearby neighborhoods. If bargaining were c ostless and all property rights were well defined, people would eli minate externalities through bargaining without the need for government regulation. 3 From this perspective, externalities arise from hi gh transactions costs and/or poorly defined property rights that prevent people from reaching e fficient outcomes through market transactions.
Resources that may become congested or overused, su ch as fisheries or the broadcast spectrum, represen t common property resources. "Public goods," such as defense or basic scientific research, are goods where prov ision of the good to some individuals cannot occur without provi ding the same level of benefits free of charge to o ther individuals.

2. Market Power
Firms exercise market power when they reduce outputbelow what would be offered in a competitive indus try in order to obtain higher prices. They may exercise market p ower collectively or unilaterally. Government actio n can be a source of market power, such as when regulatory act ions exclude low-cost imports. Generally, regulatio ns that increase market power for selected entities should be avoided. However, there are some circumstances i n which government may choose to validate a monopoly. If a market can be served at lowest cost only when produ ction is limited to a single producer B local gas and electr icity distribution services, for example B a natura l monopoly is said to exist. In such cases, the government may choose to approve the monopoly and to regulate its prices and /or production decisions. Nevertheless, you should keep in mind th at technological advances often affect economies ofscale. This can, in turn, transform what was once considered a natural monopoly into a market where competition ca n flourish.
3. Inadequate or Asymmetric Information
Market failures may also result from inadequate or asymmetric information. Because information, like o ther goods, is costly to produce and disseminate, your evaluation will need to do more than demonstrate the possible existence of incomplete or asymmetric information. Even though t he market may supply less than the full amount of i nformation, the amount it does supply may be reasonably adequat e and therefore not require government regulation. Sellers have an incentive to provide information through adverti sing that can increase sales by highlighting distin ctive characteristics of their products. Buyers may also obtain reasonably adequate information about product characteristics through other channels, such as a s eller offering a warranty or a third party providin g information.
Even when adequate information is available, people can make mistakes by processing it poorly. Poor in formationprocessing often occurs in cases of low probability , high-consequence events, but it is not limited to such situations. 

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- 4For instance, people sometimes rely on mental rules -of-thumb that produce errors. If they have a clearmental image

of an incident which makes it cognitively "availabl e," they might overstate the probability that it wi ll occur. Individuals sometimes process information in a biased manner, b y being too optimistic or pessimistic, without taki ng sufficient account of the fact that the outcome is exceedinglyunlikely to occur. When mistakes in information pr ocessing occur, markets may overreact. When it is time-consuming orcostly for consumers to evaluate complex informati on about products or services (e.g., medical therapies), the y may expect government to ensure that minimum qual ity standards are met. However, the mere possibility of poor info rmation processing is not enough to justify regulat ion. If you think there is a problem of information processing that n eeds to be addressed, it should be carefully docume nted.
4. Other Social Purposes
There are justifications for regulations in additio n to correcting market failures. A regulation may b e appropriate when you have a clearly identified measure that can make government operate more efficiently. In addition, Congress establishes some regulatory programs to redistribut e resources to select groups. Such regulations shou ld be examined to ensure that they are both effective and cost-effective. Congress also authorizes some regu lations to prohibit discrimination that conflicts with general ly accepted norms within our society. Rulemaking ma y also be appropriate to protect privacy, permit more persona l freedom or promote other democratic aspirations.
Showing That Regulation at the Federal Level Is the Best Way to Solve the Problem
Even where a market failure clearly exists, you sho uld consider other means of dealing with the failur e before turning to Federal regulation. Alternatives to Federal regu lation include antitrust enforcement, consumer-init iated litigation in the product liability system, or administrative com pensation systems.
In assessing whether Federal regulation is the bestsolution, you should also consider the possibilityof regulation at the State or local level. In some cases, the nature of the market failure may itself suggest the most appropriate governmental level of regulation. For example, prob lems that spill across State lines (such as acid ra in whose precursors are transported widely in the atmosphere ) are probably best addressed by Federal regulation . More localized problems, including those that are common to many areas, may be more efficiently addressed l ocally.
The advantages of leaving regulatory issues to Stat e and local authorities can be substantial. If publ ic values and preferences differ by region, those differences can be reflected in varying State and local regulatorypolicies. Moreover, States and localities can serve as a test ing ground for experimentation with alternative reg ulatory policies. One State can learn from another's experience while local jurisdictions may compete with each other to establish the best regulatory policies. You should examine the pr oper extent of State and local discretion in your r ulemaking context.
A diversity of rules may generate gains for the pub lic as governmental units compete with each other t o serve the public, but duplicative regulations can also be cos tly. Where Federal regulation is clearly appropriat e to address interstate commerce issues, you should try to exami ne whether it would be more efficient to retain or reduce State and local regulation. The local benefits of State regul ation may not justify the national costs of a fragm ented regulatory system. For example, the increased compliance costs for firms to meet different State and local regula tions may exceed any advantages associated with the diversityof State and local regulation. Your analysis shoul d consider the possibility of reducing as well as expanding State and local rulemaking.
The role of Federal regulation in facilitating U.S. participation in global markets should also be con sidered. Harmonization of U.S. and international rules may r equire a strong Federal regulatory role. Concerns t hat new U.S. rules could act as non-tariff barriers to imported goods should be evaluated carefully.
The Presumption Against Economic Regulation 

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- 4Government actions can be unintentionally harmful, and even useful regulations can impede market effic iency. For this

reason, there is a presumption against certain type s of regulatory action. In light of both economic t heory and actual experience, a particularly demanding burden of proo f is required to demonstrate the need for any of th e following types of regulations:
price controls in competitive markets; • production or sales quotas in competitive markets; • mandatory uniform quality standards for goods or se rvices if the potential problem can be adequately d ealt with through voluntary standards or by disclosing inform ation of the hazard to buyers or users; or •
controls on entry into employment or production, ex cept (a) where indispensable to protect health and safety (e.g., FAA tests for commercial pilots) or (b) to m anage the use of common property resources (e.g., f isheries, airwaves, Federal lands, and offshore areas). •

C. Alternative Regulatory Approaches Once you have determined that Federal regulatory action is appropriate, you will need to consider alte rnative regulatory approaches. Ordinarily, you will be able to eliminate some alternatives through a prelimina ry analysis, leaving a manageable number of alternatives to be e valuated according to the formal principles of the Executive Order. The number and choice of alternatives select ed for detailed analysis is a matter of judgment. T here must be some balance between thoroughness and the practical limits on your analytical capacity. With this qual ification in mind, you should nevertheless explore modifications of some or all of a regulation's attributes or pro visions to identify appropriate alternatives. The following is a list o f alternative regulatory actions that you should co nsider.
Different Choices Defined by Statute
When a statute establishes a specific regulatory re quirement and the agency is considering a more stri ngent standard, you should examine the benefits and costs of reason able alternatives that reflect the range of the age ncy's statutory discretion, including the specific statutory requir ement.
Different Compliance Dates
The timing of a regulation may also have an importa nt effect on its net benefits. Benefits may vary si gnificantly with different compliance dates where a delay in impleme ntation may result in a substantial loss in future benefits (e.g., a delay in implementation could result in a significa nt reduction in spawning stock and jeopardize a fis hery). Similarly, the cost of a regulation may vary substantially wit h different compliance dates for an industry that r equires a year or more to plan its production runs. In this instance, a regulation that provides sufficient lead time is likely to achieve its goals at a much lower overall cost than a regulatio n that is effective immediately.

Different Enforcement Methods
Compliance alternatives for Federal, State, or loca l enforcement include on-site inspections, periodicreporting, and noncompliance penalties structured to provide the m ost appropriate incentives. When alternative monito ring and reporting methods vary in their benefits and costs, you should identify the most appropriate enforceme nt framework. For example, in some circumstances random monitorin g or parametric monitoring will be less expensive a nd nearly as effective as continuous monitoring.
Different Degrees of Stringency 

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- 4In general, both the benefits and costs associated with a regulation will increase with the level of s tringency (although

marginal costs generally increase with stringency, whereas marginal benefits may decrease). You should study alternative levels of stringency to understand more fully the relationship between stringency and the size and distribution of benefits and costs among different groups.
Different Requirements for Different Sized Firms
You should consider setting different requirements for large and small firms, basing the requirements on estimated differences in the expected costs of compliance or in the expected benefits. The balance of benefits a nd costs can shift depending on the size of the firms being regu lated. Small firms may find it more costly to compl y with regulation, especially if there are large fixed costs required for regulatory compliance. On the other hand, it is not efficient to place a heavier burden on one segment of a regulated indu stry solely because it can better afford the highercost. This has the potential to load costs on the most productive firms, costs that are disproportionate to the damag es they create. You should also remember that a rule with a signifi cant impact on a substantial number of small entiti es will trigger the requirements set forth in the Regulatory Flexibilit y Act. (5 U.S.C. 603(c), 604).
Different Requirements for Different Geographic Regions
Rarely do all regions of the country benefit unifor mly from government regulation. It is also unlikelythat costs will be uniformly distributed across the country. Where the re are significant regional variations in benefits and/or costs, you should consider the possibility of setting differen t requirements for the different regions.
Performance Standards Rather than Design Standards
Performance standards express requirements in terms of outcomes rather than specifying the means to th ose ends. They are generally superior to engineering or desig n standards because performance standards give the regulated parties the flexibility to achieve regulatory objec tives in the most cost-effective way. In general, y ou should take into account both the cost savings to the regulated part ies of the greater flexibility and the costs of ass uring compliance through monitoring or some other means.
Market-Oriented Approaches Rather than Direct Contr ols
Market-oriented approaches that use economic incent ives should be explored. These alternatives include fees, penalties, subsidies, marketable permits or offsets , changes in liability or property rights (includin g policies that alter the incentives of insurers and insured parties), an d required bonds, insurance or warranties. One exam ple of a marketoriented approach is a program that allows for aver aging, banking, and/or trading (ABT) of credits forachieving additional emission reductions beyond the required air emission standards. ABT programs can be extreme ly valuable in reducing costs or achieving earlier or greater b enefits, particularly when the costs of achieving c ompliance vary across production lines, facilities, or firms. ABT can be allowed on a plant-wide, firm-wide, or regio n-wide basis rather than vent by vent, provided this does not produce u nacceptable local air quality outcomes (such as "ho t spots" from local pollution concentration).
Informational Measures Rather than Regulation
If intervention is contemplated to address a marketfailure that arises from inadequate or asymmetric information, informational remedies will often be preferred. Mea sures to improve the availability of information in clude government establishment of a standardized testing and rating system (the use of which could be mandatory or volu ntary), mandatory disclosure requirements (e.g., by adverti sing, labeling, or enclosures), and government prov ision of information (e.g., by government publications, tele phone hotlines, or public interest broadcast announ cements). A 

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- 4regulatory measure to improve the availability of i nformation, particularly about the concealed charac teristics of

products, provides consumers a greater choice than a mandatory product standard or ban.
Specific informational measures should be evaluated in terms of their benefits and costs. Some effects of informational measures are easily overlooked. The costs of a mand atory disclosure requirement for a consumer productwill include not only the cost of gathering and communicating th e required information, but also the loss of net be nefits of any information displaced by the mandated information. The other costs also may include the effect of prov iding information that is ignored or misinterpreted, and inefficiencies arising from the incentive that mand atory disclosure may give to overinvest in a particular characterist ic of a product or service.

Where information on the benefits and costs of alte rnative informational measures is insufficient to p rovide a clear choice between them, you should consider the least intrusive informational alternative sufficient to a ccomplish the regulatory objective. To correct an informational m arket failure it may be sufficient for government t o establish a standardized testing and rating system without mand ating its use, because competing firms that score w ell according to the system should thereby have an incentive to p ublicize the fact.

D. Analytical Approaches Both benefit-cost analysis (BCA) and cost-effective ness analysis (CEA) provide a systematic framework for identifying and evaluating the likely outcomes of alternative r egulatory choices. A major rulemaking should be sup ported by both types of analysis wherever possible. Specifically, you should prepare a CEA for all major rulemakings for which the primary benefits are improved public health and saf ety to the extent that a valid effectiveness measur e can be developed to represent expected health and safety o utcomes. You should also perform a BCA for major he alth and safety rulemakings to the extent that valid monetary values can be assigned to the primary expected he alth and safety outcomes. In undertaking these analyses, it is impo rtant to keep in mind the larger objective of analytical consistency in estimating benefits and costs across regulations and agencies, subject to statutory limitations. Fa ilure to maintain such consistency may prevent achievement of the mos t risk reduction for a given level of resource expe nditure. For all other major rulemakings, you should carry out a BCA . If some of the primary benefit categories cannot be expressed in monetary units, you should also conduct a CEA. In u nusual cases where no quantified information on ben efits, costs and effectiveness can be produced, the regulatory a nalysis should present a qualitative discussion of the issues and evidence.
Benefit-Cost Analysis

A distinctive feature of BCA is that both benefits and costs are expressed in monetary units, which al lows you to evaluate different regulatory options with a variety of attributes using a common measure. 4By measuring incremental benefits and costs of successively more stringent r egulatory alternatives, you can identify the altern ative that maximizes net benefits.

The size of net benefits, the absolute difference b etween the projected benefits and costs, indicates whether one policy is more efficient than another. The ratio ofbenefits to costs is not a meaningful indicator ofnet benefits and should not be used for that purpose. It is well kno wn that considering such ratios alone can yield mis leading results.
Even when a benefit or cost cannot be expressed in monetary units, you should still try to measure it in terms of its physical units. If it is not possible to measure th e physical units, you should still describe the ben efit or cost qualitatively. For more information on describing q ualitative information, see the section " Developing Benefit and Cost Estimates ." 

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- 4When important benefits and costs cannot be express ed in monetary units, BCA is less useful, and it ca n even be

misleading, because the calculation of net benefits in such cases does not provide a full evaluation o f all relevant benefits and costs.
You should exercise professional judgment in identi fying the importance of non-quantified factors and assess as best you can how they might change the ranking of altern atives based on estimated net benefits. If the non- quantified benefits and costs are likely to be important, you should recommend which of the non-quantified factor s are of sufficient importance to justify consideration in t he regulatory decision. This discussion should also include a clear explanation that support designating these non-quan tified factors as important. In this case, you shou ld also consider conducting a threshold analysis to help decision ma kers and other users of the analysis to understand the potential significance of these factors to the overall analys is.
Cost-Effectiveness Analysis 5
Cost-effectiveness analysis can provide a rigorous way to identify options that achieve the most effec tive use of the resources available without requiring monetization of all of relevant benefits or costs. Generally, co st-effectiveness analysis is designed to compare a set of regulatoryactions with the same primary outcome (e.g., an in crease in the acres of wetlands protected) or multiple outcomes t hat can be integrated into a single numerical index(e.g., units of health improvement).
Cost-effectiveness results based on averages need t o be treated with great care. They suffer from the same drawbacks as benefit-cost ratios. The alternative t hat exhibits the smallest cost-effectiveness ratio may not be the best option, just as the alternative with the highest be nefit-cost ratio is not always the one that maximiz es net benefits. Incremental cost-effectiveness analysis (discussed below) can help to avoid mistakes that can occur wh en policy choices are based on average cost-effectiveness.
CEA can also be misleading when the "effectiveness" measure does not appropriately weight the conseque nces of the alternatives. For example, when effectiveness is me asured in tons of reduced pollutant emissions, cost -effectiveness estimates will be misleading unless the reduced emi ssions of diverse pollutants result in the same hea lth and environmental benefits.
When you have identified a range of alternatives (e .g., different levels of stringency), you should de termine the costeffectiveness of each option compared with the base line as well as its incremental cost-effectiveness compared with successively more stringent requirements. Ideally, your CEA would present an array of cost-effectivene ss estimates that would allow comparison across different altern atives. However, analyzing all possible combination s is not practical when there are many options (including possible int eraction effects). In these cases, you should use y our judgment to choose reasonable alternatives for careful consider ation.
When constructing and comparing incremental cost-ef fectiveness ratios, you should be careful to determ ine whether the various alternatives are mutually exclusive or whether they can be combined. If they can be combin ed, you should consider which might be favored under different reg ulatory budget constraints (implicit or explicit). You should also make sure that inferior alternatives identified by the principles of strong and weak dominance are eli minated from consideration. 6

The value of CEA is enhanced when there is consiste ncy in the analysis across a diverse set of possibl e regulatory actions. To achieve consistency, you need to carefu lly construct the two key components of any CEA: th e cost and the "effectiveness" or performance measures for the alt ernative policy options. 

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- 4With regard to measuring costs, you should be sure to include all the relevant costs to society B whet her public or

private. Rulemakings may also yield cost savings (e .g., energy savings associated with new technologie s). The numerator in the cost-effectiveness ratio should re flect net costs, defined as the gross cost incurred to comply with the requirements (sometimes called "total" costs) minus any cost savings. You should be careful to avoid d ouble-counting effects in both the numerator and the denominator o f the cost-effectiveness ratios. For example, it wo uld be incorrect to reduce gross costs by an estimated monetary valu e on life extension if life-years are already used as the effectiveness measure in the denominator.
In constructing measures of "effectiveness", final outcomes, such as lives saved or life-years saved, are preferred to measures of intermediate outputs, such as tons of p ollution reduced, crashes avoided, or cases of dise ase avoided. Where the quality of the measured unit varies (e.g. , acres of wetlands vary substantially in terms of their ecological benefits), it is important that the measure capture the variability in the value of the selected "outc ome" measure. You should provide an explanation of your choice of eff ectiveness measure.
Where regulation may yield several different benefi cial outcomes, a cost-effectiveness comparison beco mes more difficult to interpret because there is more than o ne measure of effectiveness to incorporate in the a nalysis. To arrive at a single measure you will need to weight the val ue of disparate benefit categories, but this comput ation raises some of the same difficulties you will encounter in BCA. If you can assign a reasonable monetary value to a ll of the regulation's different benefits, then you should do so. But in this case, you will be doing BCA, not C EA.
When you can estimate the monetary value of some bu t not all of the ancillary benefits of a regulation , but cannot assign a monetary value to the primary measure of e ffectiveness, you should subtract the monetary esti mate of the ancillary benefits from the gross cost estimate to yield an estimated net cost. (This net cost estimat e for the rule may turn out to be negative B that is, the monetized be nefits exceed the cost of the rule.) If you are una ble to estimate the value of some of the ancillary benefits, the cost-e ffectiveness ratio will be overstated, and this sho uld be acknowledged in your analysis. CEA does not yield a n unambiguous choice when there are benefits or cos ts that have not been incorporated in the net-cost estimates. Yo u also may use CEA to compare regulatory alternativ es in cases where the statute specifies the level of benefits t o be achieved.

The Effectiveness Metric for Public Health and Safe ty Rulemakings
When CEA is applied to public health and safety rul emakings, one or more measures of effectiveness mus t be selected that permits comparison of regulatory alte rnatives. Agencies currently use a variety of effectiveness
measures.
There are relatively simple measures such as the nu mber of lives saved, cases of cancer reduced, and c ases of paraplegia prevented. Sometimes these measures acco unt only for mortality information, such as the num ber of lives saved and the number of years of life saved. There are also more comprehensive, integrated measures of effectiveness such as the number of "equivalent liv es" (ELs) saved and the number of "quality-adjusted life years" (QALYs) saved.
The main advantage of the integrated measures of ef fectiveness is that they account for a rule's impact on morbidity (nonfatal illness, injury, impairment and quality o f life) as well as premature death. The inclusion o f morbidity effects is important because (a) some illnesses (e.g., asthma) cause more instances of pain and suffering than th ey do premature death, (b) some population groups are kno wn to experience elevated rates of morbidity (e.g, the elderly and the poor) and thus have a strong interest in morbid ity measurement 7 , and (c) some regulatory alternatives may be more effective at preventing morbidity than prematu re death (e.g., some advanced airbag designs may di minish the nonfatal injuries caused by airbag inflation withou t changing the frequency of fatal injury prevented by airbags). 

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- 4However, the main drawback of these integrated meas ures is that they must meet some restrictive assump tions to

represent a valid measure of individual preferences

. 8For example, a QALY measure implicitly assumes that the fraction of remaining lifespan an individual would give up for an improvement in health-related qualit y of life does not depend on the remaining lifespan. Thus, if an indiv idual is willing to give up 10 years of life among 50 remaining years for a given health improvement, he or she would als o be willing to give up 1 year of life among 5 rema ining years. To the extent that individual preferences deviate from these assumptions, analytic results from CEA using QALYs could differ from analytic results based on willingness-t o-pay-measures. Though willingness to pay is genera lly the preferred economic method for evaluating preferences, the CEAmethod, as applied in medicine and health, does no t evaluate health changes using individual willingness to pay. When performing CEA, you should consider using at least one integrated measure of effectiveness when a rule cre ates a significant impact on both mortality and mor bidity.
When CEA is performed in specific rulemaking contex ts, you should be prepared to make appropriate adju stments to ensure fair treatment of all segments of the popula tion. Fairness is important in the choice and execu tion of effectiveness measures. For example, if QALYs are u sed to evaluate a lifesaving rule aimed at a popula tion that happens to experience a high rate of disability (i. e., where the rule is not designed to affect the di sability), the number of life years saved should not necessarily be dimin ished simply because the rule saves the lives of pe ople with lifeshortening disabilities. Both analytic simplicity a nd fairness suggest that the estimated number of li fe years saved for the disabled population should be based on average life expectancy information for the relevant age co horts. More generally, when numeric adjustments are made for li fe expectancy or quality of life, analysts should p refer use of population averages rather than information derived from subgroups dominated by a particular demograph ic or income group.
OMB does not require agencies to use any specific m easure of effectiveness. In fact, OMB encourages ag encies to report results with multiple measures of effectiven ess that offer different insights and perspectives. The regulatory analysis should explain which measures were selecte d and why, and how they were implemented.
The analytic discretion provided in choice of effectiveness measure will create some inconsistency in how agencies evaluate the same injuries and diseases, and it wil l be difficult for OMB and the public to draw meani ngful comparisons between rulemakings that employ different effective ness measures. As a result, agencies should use the ir web site to provide OMB and the public with the underlying data , including mortality and morbidity data, the age d istribution of the affected populations, and the severity and duration of disease conditions and trauma, so that OMB and the public can construct apples-to-apples comparisons between rule makings that employ different measures.

There are sensitive technical and ethical issues as sociated with choosing one or more of these integrated measures for use throughout the Federal government. The Inst itute of Medicine (IOM) may assemble a panel of spe cialists in cost-effectiveness analysis and bioethics to evalua te the advantages and disadvantages of these differ ent measures and other measures that have been suggested in the academic literature. OMB believes that the IOM guid ance will provide Federal agencies and OMB useful insight int o how to improve the measurement of effectiveness o f public health and safety regulations.

Distributional Effects
Those who bear the costs of a regulation and those who enjoy its benefits often are not the same peopl e. The term "distributional effect" refers to the impact of a r egulatory action across the population and economy, divided up in various ways (e.g., income groups, race, sex, indus trial sector, geography). Benefits and costs of a r egulation may also be distributed unevenly over time, perhaps spa nning several generations. Distributional effects m ay arise through "transfer payments" that stem from a regulatory act ion as well. For example, the revenue collected thr ough a fee, surcharge in excess of the cost of services provide d, or tax is a transfer payment. 

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- 4Your regulatory analysis should provide a separate description of distributional effects (i.e., how bo th benefits and

costs are distributed among sub-populations of part icular concern) so that decision makers can properl y consider them along with the effects on economic efficiency. Exec utive Order 12866 authorizes this approach. Where d istributive effects are thought to be important, the effects ofvarious regulatory alternatives should be describe d quantitatively to the extent possible, including the magnitude, likel ihood, and severity of impacts on particular groups . You should be alert for situations in which regulatory alternativ es result in significant changes in treatment or ou tcomes for different groups. Effects on the distribution of income that are transmitted through changes in market prices ca n be important, albeit sometimes difficult to assess. Your analysis should also present information on the streams of benefits and costs over time in order to provide a basis for assessing intertemporal distributional consequences, particu larly where intergenerational effects are concerned.
E. Identifying and Measuring Benefits and Costs This Section provides guidelines for your preparati on of the benefit and cost estimates required by Ex ecutive Order 12866 and the "Regulatory Right-to-Know Act." The d iscussions in previous sections will help you ident ify a workable number of alternatives for consideration in your an alysis and an appropriate analytical approach to us e.

General Issues
1. Scope of Analysis
Your analysis should focus on benefits and costs th at accrue to citizens and residents of the United S tates. Where you choose to evaluate a regulation that is likely to h ave effects beyond the borders of the United States , these effects should be reported separately. The time frame for y our analysis should cover a period long enough to e ncompass all the important benefits and costs likely to result f rom the rule.
2. Developing a Baseline

You need to measure the benefits and costs of a rul e against a baseline. This baseline should be the b est assessment of the way the world would look absent the proposed action. The choice of an appropriate baseline may require consideration of a wide range of potential factors, including:

evolution of the market, • changes in external factors affecting expected bene fits and costs, • changes in regulations promulgated by the agency orother government entities, and • the degree of compliance by regulated entities with other regulations. • It may be reasonable to forecast that the world abs ent the regulation will resemble the present. If th is is the case, however, your baseline should reflect the future ef fect of current government programs and policies. F or review of an existing regulation, a baseline assuming "no change " in the regulatory program generally provides an a ppropriate basis for evaluating regulatory alternatives. When more than one baseline is reasonable and the choice of baseline will significantly affect estimated benefits and costs, you should consider measuring benefits and costs ag ainst alternative baselines. In doing so you can analyze the effects on benefits and costs of making different assumptio ns about other agencies' regulations, or the degree of compliance with your own existing rules. In all cases, you mus t evaluate benefits and costs against the same baseline. You s hould also discuss the reasonableness of the baseli nes used in the sensitivity analyses. For each baseline you use , you should identify the key uncertainties in yourforecast.
EPA's 1998 final PCB disposal rule provides a good example of using different baselines. EPA used seve ral alternative baselines, each reflecting a different interpretation of existing regulatory requirements. In particular, one 

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- 4baseline reflected a literal interpretation of EPA' s 1979 rule and another the actual implementation o f that rule in the

year immediately preceding the 1998 revision. The u se of multiple baselines illustrated the substantia l effect changes in EPA's implementation policy could have on the co st of a regulatory program. In the years after EPA adopted the 1979 PCB disposal rule, changes in EPA policy -- es pecially allowing the disposal of automobile "shred der fluff" in municipal landfills -- reduced the cost of the prog ram by more than $500 million per year.
In some cases, substantial portions of a rule may s imply restate statutory requirements that would be selfimplementing, even in the absence of the regulatoryaction. In these cases, you should use a pre-statu te baseline. If you are able to separate out those areas where the agency has discretion, you may also use a post-stat ute baseline to evaluate the discretionary elements of the action.

3. Evaluation of Alternatives
You should describe the alternatives available to y ou and the reasons for choosing one alternative ove r another. As noted previously, alternatives that rely on incenti ves and offer increased flexibility are often more cost-effective than more prescriptive approaches. For instance, user fe es and information dissemination may be good altern atives to direct command-and-control regulation. Within a com mand-and-control regulatory program, performance-ba sed standards generally offer advantages over standards specifying design, behavior, or manner of complian ce.
You should carefully consider all appropriate alter natives for the key attributes or provisions of the rule. The previous discussion outlines examples of appropriate alterna tives. Where there is a "continuum" of alternatives for a standard (such as the level of stringency), you generally sh ould analyze at least three options: the preferred option; a more stringent option that achieves additional benefits (and presumably costs more) beyond those realized b y the preferred option; and a less stringent option that costs less (and presumably generates fewer benefits) than the preferred option.
You should choose reasonable alternatives deserving careful consideration. In some cases, a regulatoryprogram will focus on an option that is near or at the limit of technical feasibility. In this case, the analysis w ould not need to examine a more stringent option. For each of the op tions analyzed, you should compare the anticipated benefits to the corresponding costs.
It is not adequate simply to report a comparison ofthe agency's preferred option to the chosen baseli ne. Whenever you report the benefits and costs of alternative op tions, you should present both total and incrementa l benefits and costs. You should present incremental benefits and costs as differences from the corresponding estimat es associated with the next less-stringent alternative. 10 It is important to emphasize that incremental effe cts are simply differences between successively more stringent alternatives. R esults involving a comparison to a "next best" alte rnative may be especially useful.
In some cases, you may decide to analyze a wide arr ay of options. In 1998, DOE analyzed a large numberof options in setting new energy efficiency standards for refr igerators and freezers and produced a rich amount o f information on their relative effects. This analysis -- examining more than 20 alternative performance standards for one class of refrigerators with top-mounted freezers -- enabled DOE to select an option that produced $200 more in estimated net benefits per refrigerator than the least attractive option.
You should analyze the benefits and costs of differ ent regulatory provisions separately when a rule in cludes a number of distinct provisions. If the existence of one pro vision affects the benefits or costs arising from a nother provision, the analysis becomes more complicated, but the need to examine provisions separately remains. In this case , you should evaluate each specific provision by determining the net benefits of the proposed regulation with and w ithout it. 

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- 4Analyzing all possible combinations of provisions i s impractical if the number is large and interactio n effects are

widespread. You need to use judgment to select the most significant or relevant provisions for such an alysis. You are expected to document all of the alternatives that w ere considered in a list or table and which were se lected for emphasis in the main analysis.
You should also discuss the statutory requirements that affect the selection of regulatory approaches. If legal constraints prevent the selection of a regulatory a ction that best satisfies the philosophy and princi ples of Executive Order 12866, you should identify these constraints and estimate their opportunity cost. Such informati on may be useful to Congress under the Regulatory Right-to-Know Act.
4. Transparency and Reproducibility of Results
Because of its influential nature and its special r ole in the rulemaking process, it is appropriate to set minimum quality standards for regulatory analysis. You should provi de documentation that the analysis is based on the best reasonably obtainable scientific, technical, and economic info rmation available. To achieve this, you should relyon peer-reviewed literature, where available, and provide the source for all original information.
A good analysis should be transparent and your resu lts must be reproducible. You should clearly set ou t the basic assumptions, methods, and data underlying the analy sis and discuss the uncertainties associated with t he estimates. A qualified third party reading the analysis should be able to understand the basic elements of your a nalysis and the way in which you developed your estimates.
To provide greater access to your analysis, you sho uld generally post it, with all the supporting docu ments, on the internet so the public can review the findings. You should also disclose the use of outside consultant s, their qualifications, and history of contracts and employ ment with the agency (e.g., in a preface to the RIA ). Where other compelling interests (such as privacy, intellectual property, trade secrets, etc.) prevent the public release of data or key elements of the analysis, you should apply especial ly rigorous robustness checks to analytic results a nd document the analytical checks used.
Finally, you should assure compliance with the Info rmation Quality Guidelines for your agency and OMB' s "Guidelines for Ensuring and Maximizing the Quality, Objectivit y, Utility, and Integrity of Information Disseminat ed by Federal Agencies" ("data quality guidelines") http://www.whitehouse.gov/omb/fedreg/reproducible.h tml

. Developing Benefit and Cost Estimates

1. Some General Considerations
The analysis document should discuss the expected b enefits and costs of the selected regulatory option and any reasonable alternatives. How is the proposed action expected to provide the anticipated benefits and c osts? What are the monetized values of the potential real incremen tal benefits and costs to society? To present your results, you should:
include separate schedules of the monetized benefit s and costs that show the type and timing of benefi ts and costs, and express the estimates in this table in c onstant, undiscounted dollars (for more on discount ing see "Discount Rates" below); •

list the benefits and costs you can quantify, but c annot monetize, including their timing; • describe benefits and costs you cannot quantify; an d • identify or cross-reference the data or studies on which you base the benefit and cost estimates. • 

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- 4When benefit and cost estimates are uncertain (for more on this see " Treatment of Uncertainty " below), you should report benefit and cost estimates (including benefi ts of risk reductions) that reflect the full probab ility distribution of potential consequences. Where possible, present pro bability distributions of benefits and costs and in clude the upper and lower bound estimates as complements to central tendency and other estimates.
If fundamental scientific disagreement or lack of k nowledge prevents construction of a scientifically defensible probability distribution, you should describe benef its or costs under plausible scenarios and characte rize the evidence and assumptions underlying each alternative scenari o.
2. The Key Concepts Needed to Estimate Benefits and Costs
"Opportunity cost" is the appropriate concept for v aluing both benefits and costs. The principle of "w illingness-topay" (WTP) captures the notion of opportunity cost by measuring what individuals are willing to forgo to enjoy a particular benefit. In general, economists tend to view WTP as the most appropriate measure of opportu nity cost, but an individual's "willingness-to-accept" (WTA) compe nsation for not receiving the improvement can also provide a valid measure of opportunity cost.
WTP and WTA are comparable measures under special c ircumstances. WTP and WTA measures may be comparabl e in the following situations: if a regulation affect s a price change rather than a quantity change; the change being evaluated is small; there are reasonably close subs titutes available; and the income effect is small. 11 However, empirical evidence from experimental economics and psychology shows that even when income/wealth effects are "small", the measured differences between WTP and W TA can be large. 12WTP is generally considered to be more readily measurable. Adoption of WTP as the measure of value implies that individual preferences of the affected population should be a guiding factor in the regula tory analysis.
Market prices provide rich data for estimating bene fits and costs based on willingness-to-pay if the g oods and services affected by the regulation are traded in well-funct ioning competitive markets. The opportunity cost ofan alternative includes the value of the benefits forgone as a res ult of choosing that alternative. The opportunity c ost of banning a product -- a drug, food additive, or hazardous chem ical -- is the forgone net benefit (i.e., lost cons umer and producer surplus 13 ) of that product, taking into account the mitigati ng effects of potential substitutes.
The use of any resource has an opportunity cost reg ardless of whether the resource is already owned orhas to be purchased. That opportunity cost is equal to the ne t benefit the resource would have provided in the a bsence of the requirement. For example, if regulation of an indus trial plant affects the use of additional land or b uildings within the existing plant boundary, the cost analysis should i nclude the opportunity cost of using the additional land or facilities.
To the extent possible, you should monetize any suc h forgone benefits and add them to the other costs of that alternative. You should also try to monetize any co st savings as a result of an alternative and eitheradd it to the benefits or subtract it from the costs of that alte rnative. However, you should not assume that the "a voided" costs of not doing another regulatory alternative represent the benefits of a regulatory action where there is no direct, necessary relationship between the two. You should also be careful when the costs avoided are attribut able to an existing regulation. Even when there is a direct re lationship between the two regulatory actions, the use of avoided costs is problematic because the existing regulatio n may not maximize net benefits and thus may itselfbe questionable policy. (See the section, "Direct Use of Market Data," for more detail.)
Estimating benefits and costs when market prices ar e hard to measure or markets do not exist is more d ifficult. In these cases, you need to develop appropriate proxie s that simulate market exchange. Estimates of willi ngness-to-pay based on revealed preference methods can be quite u seful. As one example, analysts sometimes use "hedo nic price equations" based on multiple regression analysis ofmarket behavior to simulate market prices for the commodity of 

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- 4interest. The hedonic technique allows analysts to develop an estimate of the price for specific attri butes associated

with a product. For instance, a house is a product characterized by a variety of attributes including the number of rooms, total floor area, and type of heating and co oling. If there are enough data on transactions in the housing market, it is possible to develop an estimate of th e implicit price for specific attributes, such as t he implicit price of an additional bathroom or for central air conditioning . This technique can be extended, as well, to devel op an estimate for the implicit price of public goods that are not dir ectly traded in markets. An analyst can develop imp licit price estimates for public goods like air quality and access to pub lic parks by assessing the effects of these goods o n the housing market. Going through the analytical process of der iving benefit estimates by simulating markets may a lso suggest alternative regulatory strategies that create such markets.
You need to guard against double-counting, since so me attributes are embedded in other broader measure s. To illustrate, when a regulation improves the quality of the environment in a community, the value of rea l estate in the community generally rises to reflect the greater attractiveness of living in a better environment. Sim ply adding the increase in property values to the estimated value of improved public health would be double counting if the increase in property values reflects the improvement in publ ic health. To avoid this problem you should separat e the embedded effects on the value of property arising from impro ved public health. At the same time, an analysis th at fails to incorporate the consequence of land use changes whe n accounting for costs will not capture the full ef fects of regulation.

3. Revealed Preference Methods
Revealed preference methods develop estimates of th e value of goods and services -- or attributes of t hose goods and services -- based on actual market decisions by con sumers, workers and other market participants. If t he market participant is well informed and confronted with a real choice, it may be feasible to determine accura tely and precisely the monetary value needed for a rulemaking. There i s a large and well-developed literature on revealed preference in the peer-reviewed, applied economics literature.
Although these methods are well grounded in economi c theory, they are sometimes difficult to implementgiven the complexity of market transactions and the paucity o f relevant data. When designing or evaluating a rev ealed preference study, the following principles should b e considered:
the market should be competitive. If the market isn 't competitive (e.g., monopoly, oligopoly), then yo u should consider making adjustments such that the price ref lects the true value to society (often called the " shadow price"); •

the market should not exhibit a significant informa tion gap or asymmetric information problem. If the market suffers from information problems, then you should discuss the divergence of the price from the underl ying shadow price and consider possible adjustments to r eflect the underlying shadow price; •

the market should not exhibit an externality. In th is case, you should discuss the divergence of the p rice from the underlying shadow price and consider possible a djustments to reflect the underlying shadow price; •
the specific market participants being studied shou ld be representative of the target populations to b e affected by the rulemaking under consideration; •
a valid research design and framework for analysis should be adopted. Examples include using data and/or model specifications that include the markets for s ubstitute and complementary goods and services and using reasonably unrestricted functional forms. When spec ifying substitute and complementary goods, the anal ysis should preferably be based on data about the range of alternatives perceived by market participants. I f such data are not available, you should adopt plausible assumptions and describe the limitations of the ana lysis. • 

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- 4the statistical and econometric models employed sho uld be appropriate for the application and the resu lting

estimates should be robust in response to plausible changes in model specification and estimation tech nique; and •

the results should be consistent with economic theo ry. • You should also determine whether there are multipl e revealed-preference studies of the same good or s ervice and whether anything can be learned by comparing the me thods, data and findings from different studies. Pr ofessional judgment is required to determine whether a particu lar study is of sufficient quality to justify use i n regulatory analysis. When studies are used in regulatory analysis despit e their technical weaknesses (e.g., due to the abse nce of other evidence), the regulatory analysis should discuss a ny biases or uncertainties that are likely to arise due to those weaknesses. If a study has major weaknesses, the st udy should not be used in regulatory analysis.

Direct Uses of Market Data
Economists ordinarily consider market prices as the most accurate measure of the marginal value of goo ds and services to society. In some instances, however, ma rket prices may not reflect the true value of goods and services due to market imperfections or government intervent ion. If a regulation involves changes to goods or s ervices where the market price is not a good measure of the value to society, you should use an estimate that reflects the shadow price. Suppose a particular air pollutant da mages crops. One of the benefits of controlling that pollutant is the value of the crop yield increase as a result ofthe controls. That value is typically measured by the price of the crop. However, if the price is held above the marke t price by a government program that affects supply , a value estimate based on this price may not reflect the tr ue benefits of controlling the pollutant. In this c ase, you should calculate the value to society of the increase in c rop yields by estimating the shadow price, which re flects the value to society of the marginal use of the crop. If the marginal use is for exports, you should use the wor ld price. If the marginal use is to add to very large surplus stockp iles, you should use the value of the last units re leased from storage minus storage cost. If stockpiles are large and growing, the shadow price may be low or even n egative.
Other goods whose market prices may not reflect the ir true value include those whose production or con sumption results in substantial (1) positive or negative ext ernal effects or (2) transfer payments. For example , the observed market price of gasoline may not reflect marginal s ocial value due to the inclusion of taxes, other go vernment interventions, and negative externalities (e.g., po llution). This shadow price may also be needed for goods whose market price is substantially affected by existing regulations that do not maximize net benefits. a.

Indirect Uses of Market Data
Many goods or attributes of goods that are affected by regulation--such as preserving environmental orcultural amenities--are not traded directly in markets. The value for these goods or attributes arise both from use and nonuse. Estimation of these values is difficult becaus e of the absence of an organized market. However, o verlooking or ignoring these values in your regulatory analysis m ay significantly understate the benefits and/or cos ts of regulatory action.

"Use values" arise where an individual derives sati sfaction from using the resource, either now or in the future. Use values are associated with activities such as swimm ing, hunting, and hiking where the individual makes use of the natural environment.
"Non-use values" arise where an individual places v alue on a resource, good or service even though the individual will not use the resource, now or in the future. No n-use value includes bequest and existence values.

General altruism for the health and welfare of othe rs is a closely related concept but may not be stri ctly considered b. 

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- 4a "non-use" value. 14A general concern for the welfare of others should supplement benefits and costs equally;

hence, it is not necessary to measure the size of g eneral altruism in regulatory analysis. If there is evidence of selective altruism, it needs to be considered speci fically in both benefits and costs.
Some goods and services are indirectly traded in ma rkets, which means that their value is reflected in the prices of related goods and services that are directly traded in markets. Their use values are typically estimat ed through revealed preference methods. Examples include estim ates of the values of environmental amenities deriv ed from travel-cost studies, and hedonic price models that measure differences or changes in the value of real estate. It is important that you utilize revealed preference mode ls that adhere to economic criteria that are consis tent with utility maximizing behavior. Also, you should take particul ar care in designing protocols for reliably estimat ing the values of these attributes.

4. Stated Preference Methods
Stated Preference Methods (SPM) have been developed and used in the peer-reviewed literature to estima te both "use" and "non-use" values of goods and services. T hey have also been widely used in regulatory analys es by Federal agencies, in part, because these methods can be cre atively employed to address a wide variety of goods and services that are not easy to study through revealed prefere nce methods.
The distinguishing feature of these methods is thathypothetical questions about use or non-use values are posed to survey respondents in order to obtain willingness-t o-pay estimates relevant to benefit or cost estimat ion. Some examples of SPM include contingent valuation, conjo int analysis and risk-tradeoff analysis. The survey s used to obtain the health-utility values used in CEA are similar t o stated-preference surveys but do not entail monet ary measurement of value. Nevertheless, the principles governing qu ality stated-preference research, with some obvious exceptions involving monetization, are also relevant in design ing quality health-utility research.
When you are designing or evaluating a stated-prefe rence study, the following principles should be con sidered:
the good or service being evaluated should be expla ined to the respondent in a clear, complete and obj ective fashion, and the survey instrument should be pre-te sted; •
willingness-to-pay questions should be designed to focus the respondent on the reality of budgetary li mitations and alerted to the availability of substitute goods and alternative expenditure options; •
the survey instrument should be designed to probe b eyond general attitudes (e.g., a "warm glow" effectfor a particular use or non-use value) and focus on the m agnitude of the respondent's economic valuation; •
the analytic results should be consistent with econ omic theory using both "internal" (within responden t) and "external" (between respondent) scope tests such as the willingness to pay is larger (smaller) when mo re (less) of a good is provided; •

the subjects being interviewed should be selected/s ampled in a statistically appropriate manner. The s ample frame should adequately cover the target population . The sample should be drawn using probability meth ods in order to generalize the results to the target popul ation; •

response rates should be as high as reasonably poss ible. Best survey practices should be followed to a chieve high response rates. Low response rates increase th e potential for bias and raise concerns about the generalizability of the results. If response rates are not adequate, you should conduct an analysis ofnonresponse bias or further study. Caution should be u sed in assessing the representativeness of the samp le based solely on demographic profiles. Statistical a djustments to reduce non-response bias should be undertaken whenever feasible and appropriate; • 

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- 4the mode of administration of surveys (in-person, p hone, mail, computer, internet or multiple modes ) should be

appropriate in light of the nature of the questions being posed to respondents and the length and comp lexity of the instrument; •

documentation should be provided about the target p opulation, the sampling frame used and its coverage of the target population, the design of the sample includi ng any stratification or clustering, the cumulative response rate (including response rate at each stage of sele ction if applicable); the item non-response rate fo r critical questions; the exact wording and sequence of questi ons and other information provided to respondents; and the training of interviewers and techniques they em ployed (as appropriate); •

the statistical and econometric methods used to ana lyze the collected data should be transparent, well suited for the analysis, and applied with rigor and care. •

Professional judgment is necessary to apply these c riteria to one or more studies, and thus there is n o mechanical formula that can be used to determine whether a particular study is of sufficient quality to justify u se in regulatory analysis. When studies are used despite having weak nesses on one or more of these criteria, those weak nesses should be acknowledged in the regulatory analysis, including any resulting biases or uncertainties that are likely to result. If a study has too many weaknesses with unk nown consequences for the quality of the data, the study should not be used.
The challenge in designing quality stated-preferenc e studies is arguably greater for non-use values an d unfamiliar use values than for familiar goods or services that are traded (directly or indirectly) in market transact ions. The good being valued may have little meaning to respondents, and respondents may be forming their valuations for the first time in response to the questions posed. Since these values are effectively constructed by the respondent duri ng the elicitation, the instrument and mode of administrat ion should be rigorously pre-tested to make sure th at responses are not simply an artifact of specific features of inst rument design and/or mode of administration.
Since SPM generate data from respondents in a hypot hetical setting, often on complex and unfamiliar go ods, special care is demanded in the design and execution of surveys, analysis of the results, and characterization of the uncertainties. A stated-preference study may be the only way to obtain quantitative information about non-use values, though a number based on a poor quality study is no t necessarily superior to no number at all. Non-use values that are not quantified should be presented as an "intangibl e" benefit or cost.
If both revealed-preference and stated-preference s tudies that are directly applicable to regulatory a nalysis are available, you should consider both kinds of eviden ce and compare the findings. If the results diverge significantly, you should compare the overall size and quality of the two bodies of evidence. Other things equal, you sho uld prefer revealed preference data over stated preference dat a because revealed preference data are based on act ual decisions, where market participants enjoy or suffe r the consequences of their decisions. This is not generally the case for respondents in stated preference surveys, where respondents may not have sufficient incentives to offer thoughtful responses that are more consistent with their prefe rences or may be inclined to bias their responses f or one reason or another.

5. Benefit-Transfer Methods
It is often preferable to collect original data on revealed preference or stated preference to supportregulatory analysis. Yet conducting an original study may not be feasibl e due to the time and expense involved. One alternative to conducting an original study is the use of "benefittransfer" methods. (The transfer may involve cost determination as well). The practice of "benefit transfer" began wit h transferring existing estimates obtained from ind irect market and stated preference studies to new contexts (i.e., th e context posed by the rulemaking). The principles that guide transferring estimates from indirect market and stated preference studies should apply to direct marke t studies as well. 

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- 4Although benefit-transfer can provide a quick, low- cost approach for obtaining desired monetary values , the methods

are often associated with uncertainties and potenti al biases of unknown magnitude. It should therefore be treated as a last-resort option and not used without explicit ju stification.
In conducting benefit transfer, the first step is t o specify the value to be estimated for the rulemak ing. You should identify the relevant measure of the policy change at this initial stage. For instance, you can derive the relevant willingness-to-pay measure by specifying an indirect utility function. This identification allows you to "zero in" on key aspects of the benefit transfer.
The next step is to identify appropriate studies to conduct benefit transfer. In selecting transfer st udies for either point transfers or function transfers, you should base yo ur choices on the following criteria:
The selected studies should be based on adequate data, sound and defensible empirical methods and techniques. •
The selected studies should document parameter esti mates of the valuation function. • The study context and policy context should have si milar populations (e.g., demographic characteristic s). The market size (e.g., target population) between the s tudy site and the policy site should be similar. Fo r example, a study valuing water quality improvement in Rhode Is land should not be used to value policy that will affect water quality throughout the United States. •

The good, and the magnitude of change in that good, should be similar in the study and policy contexts

. • The relevant characteristics of the study and the p olicy contexts should be similar. For example, the effects examined in the original study should be "reversibl e" or "irreversible" to a degree that is similar to the regulatory actions under consideration. •

The distribution of property rights should be simil ar so that the analysis uses the same welfare measu re. If the property rights in the study context support the us e of WTA measures while the rights in the rulemakin g context support the use of WTP measures, benefit transfer i s not appropriate. •

The availability of substitutes across study and po licy contexts should be similar. • If you can choose between transferring a function o r a point estimate, you should transfer the entire demand function (referred to as benefit function transfer) rather t han adopting a single point estimate (referred to a s benefit point transfer). 15
Finally, you should not use benefit transfer in est imating benefits if:
resources are unique or have unique attributes. Forexample, if a policy change affects snowmobile use in Yellowstone National Park, then a study valuing sno wmobile use in the state of Michigan should not be used to value changes in snowmobile use in the Yellowstone National Park. •

If the study examines a resource that is unique or has unique attributes, you should not transfer bene fit estimates or benefit functions to value a differentresource and vice versa. For example, if a study v alues visibility improvements at the Grand Canyon, these results should not be used to value visibility impr ovements in urban areas. •

There are significant problems with applying an " ex ante" valuation estimate to an "ex post" policy context . If a policy yields a significant change in the attribute s of the good, you should not use the study estimat es to value the change using a benefit transfer approach. •

You also should not use a value developed from a st udy involving, small marginal changes in a policy c ontext involving large changes in the quantity of the good

. • 

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- 4Clearly, all of these criteria are difficult to mee t. However, you should attempt to satisfy as many a s possible when

choosing studies from the existing economic literat ure. Professional judgment is required in determini ng whether a particular transfer is too speculative to use in re gulatory analysis.
6. Ancillary Benefits and Countervailing Risks
Your analysis should look beyond the direct benefit s and direct costs of your rulemaking and consider any important ancillary benefits and countervailing risks. An anc illary benefit is a favorable impact of the rule th at is typically unrelated or secondary to the statutory purpose of the rulemaking (e.g., reduced refinery emissions du e to more stringent fuel economy standards for light trucks) while a countervailing risk is an adverse economic, health, safety, or environmental consequence that occurs due to a rule and is not already accounted for in the direct cos t of the rule (e.g., adverse safety impacts from more stringent f uel-economy standards for light trucks).
You should begin by considering and perhaps listing the possible ancillary benefits and countervailing risks. However, highly speculative or minor consequences may not be worth further formal analysis. Analytic priority s hould be given to those ancillary benefits and countervailing risks t hat are important enough to potentially change the rank ordering of the main alternatives in the analysis. In some case s the mere consideration of these secondary effects may help in the generation of a superior regulatory alternative wit h strong ancillary benefits and fewer countervailin g risks. For instance, a recent study suggested that weight-base d, fuel-economy standards could achieve energy savi ngs with fewer safety risks and employment losses than would occur under the current regulatory structure.

Like other benefits and costs, an effort should be made to quantify and monetize ancillary benefits an d countervailing risks. If monetization is not feasible, quantificat ion should be attempted through use of informative physical units. If both monetization and quantification are not feasib le, then these issues should be presented as non-qu antified benefits and costs. The same standards of informati on and analysis quality that apply to direct benefi ts and costs should be applied to ancillary benefits and countervailing risks.
One way to combine ancillary benefits and counterva iling risks is to evaluate these effects separatelyand then put both of these effects on the benefits side, not on the cost side. Although it is theoretically appropr iate to include disbenefits on the cost side, legal and programmati c considerations generally support subtracting the disbenefits from direct benefits.
7. Methods for Treating Non-Monetized Benefits and Costs
Sound quantitative estimates of benefits and costs, where feasible, are preferable to qualitative desc riptions of benefits and costs because they help decision makers underst and the magnitudes of the effects of alternative ac tions. However, some important benefits and costs (e.g., p rivacy protection) may be inherently too difficult to quantify or monetize given current data and methods. You should carry out a careful evaluation of non-quantified b enefits and costs. Some authorities 16 refer to these non-monetized and non-quantified ef fects as "intangible".

Benefits and Costs that are Difficult to Monetize
You should monetize quantitative estimates wheneverpossible. Use sound and defensible values or proce dures to monetize benefits and costs, and ensure that key an alytical assumptions are defensible. If monetizatio n is impossible, explain why and present all available q uantitative information. For example, if you can qu antify but cannot monetize increases in water quality and fish populations resulting from water quality regulatio n, you can describe benefits in terms of stream miles of impro ved water quality for boaters and increases in game fish populations for anglers. You should describe the ti ming and likelihood of such effects and avoid doubl e-counting of a. 

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- 4benefits when estimates of monetized and physical e ffects are mixed in the same analysis.

Benefits and Costs that are Difficult to Quantify
If you are not able to quantify the effects, you sh ould present any relevant quantitative information along with a description of the unquantified effects, such as ec ological gains, improvements in quality of life, an d aesthetic beauty. You should provide a discussion of the stre ngths and limitations of the qualitative informatio n. This should include information on the key reason(s) why they c annot be quantified. In one instance, you may know with certainty the magnitude of a risk to which a substa ntial, but unknown, number of individuals are expos ed. In another instance, the existence of a risk may be ba sed on highly speculative assumptions, and the magn itude of the risk may be unknown.
For cases in which the unquantified benefits or cos ts affect a policy choice, you should provide a cle ar explanation of the rationale behind the choice. Such an explanation could include detailed information on the natu re, timing, likelihood, location, and distribution of the unqua ntified benefits and costs. Also, please include a summary table that lists all the unquantified benefits and costs, and use your professional judgment to highlight (e .g., with categories or rank ordering) those that you believe are most important (e.g., by considering factors s uch as the degree of certainty, expected magnitude, and revers ibility of effects).
While the focus is often placed on difficult to qua ntify benefits of regulatory action, some costs are difficult to quantify as well. Certain permitting requirements ( e.g., EPA's New Source Review program) restrict the decisions of production facilities to shift to new products a nd adopt innovative methods of production. While th ese programs may impose substantial costs on the economy, it is very difficult to quantify and monetize these effec ts. Similarly, regulations that establish emission standards for r ecreational vehicles, like motor bikes, may adverse ly affect the performance of the vehicles in terms of driveabilit y and 0 to 60 miles per hour acceleration. Again, t he cost associated with the loss of these attributes may be difficult to quantify and monetize. They need to b e analyzed qualitatively. b.

8. Monetizing Health and Safety Benefits and Costs
We expect you to provide a benefit-cost analysis ofmajor health and safety rulemakings in addition to a CEA. The BCA provides additional insight because (a) it prov ides some indication of what the public is willing to pay for improvements in health and safety and (b) it offers additional information on preferences for health u sing a different research design than is used in CEA. Since the heal th-preference methods used to support CEA and BCA h ave some different strengths and drawbacks, it is important that you provide decision makers with both perspect ives.
In monetizing health benefits, a WTP measure is the conceptually appropriate measure as compared to ot her alternatives (e.g., cost of illness or lifetime ear nings), in part because it attempts to capture pain and suffering and other quality-of-life effects. Using the WTP measur e for health and safety allows you to directly comp are your results to the other benefits and costs in your analysis, whic h will typically be based on WTP.
If well-conducted revealed-preference studies of re levant health and safety risks are available, you s hould consider using them in developing your monetary estimates. I f appropriate revealed-preference data are not avai lable, you should use valid and relevant data from stated-pref erence studies. You will need to use your professio nal judgment when you are faced with limited information on reve aled preference studies and substantial information based on stated preference studies.
A key advantage of stated-preference and health-uti lity methods compared to revealed preference method s is that they can be tailored to address the ranges of proba bilities, types of health risks and specific popula tions affected by 

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- 4your rule. In many rulemakings there will be no rel evant information from revealed-preference studies. In this situation

you should consider commissioning a stated-preferen ce study or using values from published stated-pref erence studies. For the reasons discussed previously, you should be cautious about using values from stated-p reference studies and describe in the analysis the drawbacks of this approach.
Nonfatal Health and Safety Risks
With regard to nonfatal health and safety risks, th ere is enormous diversity in the nature and severit y of impaired health states. A traumatic injury that can be treat ed effectively in the emergency room without hospit alization or long-term care is different from a traumatic injuryresulting in paraplegia. Severity differences are also important in evaluation of chronic diseases. A severe bout of br onchitis, though perhaps less frequent, is far more painful and debilitating than the more frequent bouts of mild b ronchitis. The duration of an impaired health state , which can range from a day or two to several years or even a lifetime (e.g., birth defects inducing mental retar dation), need to be considered carefully. Information on both the se verity and duration of an impaired health state is necessary before the task of monetization can be performed.
When monetizing nonfatal health effects, it is impo rtant to consider two components: (1) the private d emand for prevention of the nonfatal health effect, to be rep resented by the preferences of the target populatio n at risk, and (2) the net financial externalities associated with poor health such as net changes in public medical costs and any net changes in economic production that are not exp erienced by the target population. Revealed-prefere nce or stated-preference studies are necessary to estimate the private demand; health economics data from pub lished sources can typically be used to estimate the finan cial externalities caused by changes in health stat us. If you use literature values to monetize nonfatal health and s afety risks, it is important to make sure that the values you have selected are appropriate for the severity and durat ion of health effects to be addressed by your rule.
If data are not available to support monetization, you might consider an alternative approach that makes use of health-utility studies. Although the economics lite rature on the monetary valuation of impaired health states is growing, there is a much larger clinical literature on how patients, providers and community residents value diverse health states. This literature typically measures h ealth utilities based on the standard gamble, the t ime tradeoff or the rating scale methods. This health utility infor mation may be combined with known monetary values f or welldefined health states to estimate monetary values f or a wide range of health states of different sever ity and duration. If you use this approach, you should be c areful to acknowledge your assumptions and the limi tations of your estimates. a.

Fatality Risks
Since agencies often design health and safety regul ation to reduce risks to life, evaluation of these benefits can be the key part of the analysis. A good analysis must present these benefits clearly and show their importance. Agencies may choose to monetize these benefits. The willingness-to-pay approach is the best methodolog y to use if reductions in fatality risk are monetized.
Some describe the monetized value of small changes in fatality risk as the "value of statistical life" (VSL) or, less precisely, the "value of a life." The latter phrase can be misleading because it suggests erroneously that the monetization exercise tries to place a "value" on i ndividual lives. You should make clear that these t erms refer to the measurement of willingness to pay for reduction s in only small risks of premature death. They have no application to an identifiable individual or to very large reductions in individual risks. They do notsuggest that any individual's life can be expressed in monetary term s. Their sole purpose is to help describe better th e likely benefits of a regulatory action.

Confusion about the term "statistical life" is also widespread. This term refers to the sum of risk re ductions b. 

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- 4expected in a population. For example, if the annua l risk of death is reduced by one in a million for each of two

million people, that is said to represent two "stat istical lives" extended per year (2 million people x 1/1,000,000 = 2). If the annual risk of death is reduced by one in 10 million for each of 20 million people, that also r epresents two statistical lives extended.
The adoption of a value for the projected reduction in the risk of premature mortality is the subject of continuing discussion within the economic and public policy an alysis community. A considerable body of academic l iterature is available on this subject. This literature involves either explicit or implicit valuation of fatality risks, and generally involves the use of estimates of VSL from studies o n wage compensation for occupational hazards (which generally are in the range of 10-4 annually), on co nsumer product purchase and use decisions, or from an emerging literature using stated preference approac hes. A substantial majority of the resulting estima tes of VSL vary from roughly $1 million to $10 million per sta tistical life. 17
There is a continuing debate within the economic an d public policy analysis community on the merits ofusing a single VSL for all situations versus adjusting the VSL estimates to reflect the specific rule context. A variety of factors have been identified, including whether the mortality risk involves sudden death, the fear of cancer, and the extent to which the risk is voluntarily incurred. 18The consensus of EPA's recent Science Advisory Boa rd (SAB) review of this issue was that the available literat ure does not support adjustments of VSL for most ofthese factors. The panel did conclude that it was appropriate to a djust VSL to reflect changes in income and any time lag in the occurrence of adverse health effects.
The age of the affected population has also been id entified as an important factor in the theoretical literature. However, the empirical evidence on age and VSL is m ixed. In light of the continuing questions over the effect of age on VSL estimates, you should not use an age-adj ustment factor in an analysis using VSL estimates. 19
Another way that has been used to express reduction s in fatality risks is to use the life expectancy m ethod, the "value of statistical life-years (VSLY) extended." If a regulation protects individuals whose average remaining life expectancy is 40 years, a risk reduction of one fat ality is expressed as "40 life-years extended." Tho se who favor this alternative approach emphasize that the value of a statistical life is not a single number releva nt for all situations. In particular, when there are significa nt differences between the effect on life expectanc y for the population affected by a particular health risk and the populations studied in the labor market studie s, they prefer to adopt a VSLY approach to reflect those differences. You should consider providing estimates of both VS L and VSLY, while recognizing the developing state of kno wledge in this area.
Longevity may be only one of a number of relevant c onsiderations pertaining to the rule. You should ke ep in mind that regulations with greater numbers of life-years extended are not necessarily better than regulatio ns with fewer numbers of life-years extended. In any event, when you present estimates based on the VSLY method, you should adopt a larger VSLY estimate for senior citizens be cause senior citizens face larger overall health ri sks from all causes and they may have accumulated savings to spe nd on their health and safety. 20
The valuation of fatality risk reduction is an evol ving area in both results and methodology. Hence, y ou should utilize valuation methods that you consider appropr iate for the regulatory circumstances. Since the li terature-based VSL estimates may not be entirely appropriate for t he risk being evaluated (e.g., the use of occupatio nal risk premia to value reductions in risks from environmen tal hazards), you should explain your selection of estimates and any adjustments of the estimates to reflect the nature of the risk being evaluated. You should pre sent estimates based on alternative approaches, and if y ou monetize mortality risk reduction, you should do so on a consistent basis to the extent feasible. You should clearly indicate the methodology used and documentyour choice of a particular methodology. You should expl ain any significant deviations from the prevailing state of knowledge. If you use different methodologies in di fferent rules, you should clearly disclose the factand explain 

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- 4your choices.

Valuation of Reductions in Health and Safety Risks to Children

The valuation of health outcomes for children and i nfants poses special challenges. It is rarely feasi ble to measure a child's willingness to pay for health improvementand an adult's concern for his or her own health i s not necessarily relevant to valuation of child health. For example, the wage premiums demanded by workers to accept hazardous jobs are not readily transferred to rules that accomplish health gains for children.
There are a few studies that examine parental willi ngness to pay to invest in health and safety for th eir children. Some of these studies suggest that parents may valu e children’s health more strongly than their own he alth. Although this parental perspective is a promising r esearch strategy, it may need to be expanded to inc lude a societal interest in child health and safety.
Where the primary objective of a rule is to reduce the risk of injury, disease or mortality among chil dren, you should conduct a cost-effectiveness analysis of the rule. You may also develop a benefit-cost analysis to the extent that valid monetary values can be assigned to the primary expected health outcomes. For rules where health gains are expected among both children and adults and you dec ide to perform a benefit-cost analysis, the monetary values for children should be at least as large as the val ues for adults (for the same probabilities and outc omes) unless there is specific and compelling evidence to sugges t otherwise. 21 c.

Discount Rates
Benefits and costs do not always take place in the same time period. When they do not, it is incorrectsimply to add all of the expected net benefits or costs without takin g account of when the actually occur. If benefits o r costs are delayed or otherwise separated in time from each other, the difference in timing should be reflected in your a nalysis.
As a first step, you should present the annual time stream of benefits and costs expected to result fr om the rule, clearly identifying when the benefits and costs are expecte d to occur. The beginning point for your stream of estimates should be the year in which the final rule will begin to h ave effects, even if that is expected to be some ti me in the future. The ending point should be far enough in the future to encompass all the significant benefits and costs li kely to result from the rule.
In presenting the stream of benefits and costs, it is important to measure them in constant dollars to avoid the misleading effects of inflation in your estimates. If the benefits and costs are initially measured in prices reflecting expected future inflation, you can convert them to constant dollars by dividing through by an appropri ate inflation index, one that corresponds to the inflation rate u nderlying the initial estimates of benefits or cost s.
1. The Rationale for Discounting
Once these preliminaries are out of the way, you ca n begin to adjust your estimates for differences in timing. (This is a separate calculation from the adjustment needed to remove the effects of future inflation.) Benefits o r costs that occur sooner are generally more valuable. The main ration ales for the discounting of future impacts are:

(a) Resources that are invested will normally earn a positive return, so current consumption is more e xpensive than future consumption, since you are giving up that ex pected return on investment when you consume today.
(b) Postponed benefits also have a cost because peo ple generally prefer present to future consumption. They are said 

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- 4to have positive time preference.

(c) Also, if consumption continues to increase overtime, as it has for most of U.S. history, an incre ment of consumption will be less valuable in the future tha n it would be today, because the principle of dimin ishing marginal utility implies that as total consumption increases , the value of a marginal unit of consumption tends to decline.
There is wide agreement with point (a). Capital inv estment is productive, but that point is not suffic ient by itself to explain positive interest rates and observed saving behavior. To understand these phenomena, points (b ) and (c) are also necessary. If people are really indifferent be tween consumption now and later, then they should b e willing to forgo current consumption in order to consume an equal orslightly greater amount in the future. That would cause saving rates and investment to rise until interest rates w ere driven to zero and capital was no longer productive. As long as we observe positive interest rates and saving rates below 100 percent, people must be placing a highervalue on current consumption than on future consumption.
To reflect this preference, a discount factor shoul d be used to adjust the estimated benefits and cost s for differences in timing. The further in the future the benefits and costs are expected to occur, the more they should b e discounted. The discount factor can be calculated given a discount rate. The formula is 1/ (1+ the discount rate)t whe re "t" measures the number of years in the future that the benefits or costs are expected to occur. Benefits or costs that have been adjusted in this way are called "discounted presentvalues" or simply Apresent values". When, and onlywhen, the estimated benefits and costs have been discounted, they can be added to determine the overall value ofnet benefits.

2. Real Discount Rates of 3 Percent and 7 Percent
OMB's basic guidance on the discount rate is provid ed in OMB Circular A-94 ( http://www.whitehouse.gov/omb/circulars/index.html ). This Circular points out that the analytically p referred method of handling temporal differences between benefits and costs is to adjust all the benefits and costs to re flect their value in equivalent units of consumption and to discount the m at the rate consumers and savers would normally u se in discounting future consumption benefits. This is so metimes called the "shadow price" approach to disco unting because doing such calculations requires you to val ue benefits and costs using shadow prices, especial ly for capital goods, to correct for market distortions. These sha dow prices are not well established for the United States. Furthermore, the distribution of impacts from regul ations on capital and consumption are not always we ll known. Consequently, any agency that wishes to tackle this challenging analytical task should check with OMB before proceeding.
As a default position, OMB Circular A-94 states that a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent rate is an e stimate of the average before-tax rate of return to private capital in the U.S. economy. It is a broad measure that reflects the returns to real estate and small business ca pital as well as corporate capital. It approximates the opportunity cost of capital, and it is the appropriate discountrate whenever the main effect of a regulation is to displace or alterthe use of capital in the private sector. OMB revi sed Circular A-94 in 1992 after extensive internal review and public com ment. In a recent analysis, OMB found that the aver age rate of return to capital remains near the 7 percent rate e stimated in 1992. Circular A-94 also recommends usi ng other discount rates to show the sensitivity of the estim ates to the discount rate assumption.
Economic distortions, including taxes on capital, c reate a divergence between the rate of return that savers earn and the private rate of return to capital. This diverge nce persists despite the tendency for capital to fl ow to where it can earn the highest rate of return. Although market fo rces will push after-tax rates of return in differe nt sectors of the economy toward equality, that process will not equa te pre-tax rates of return when there are differenc es in the tax treatment of investment. Corporate capital, in part icular, pays an additional layer of taxation, the c orporate income tax, which requires it to earn a higher pre-tax rate of return in order to provide investors with similar a fter-tax rates of return compared with non-corporate investments. The pre-ta x rates of return better measure society's gains fr om investment. 

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- 4Since the rates of return on capital are higher in some sectors of the economy than others, the govern ment needs to

be sensitive to possible impacts of regulatory poli cy on capital allocation.
The effects of regulation do not always fall exclus ively or primarily on the allocation of capital. Wh en regulation primarily and directly affects private consumption (e.g., through higher consumer prices for goods and services), a lower discount rate is appropriate. The alternative most often used is sometimes called the "social ra te of time preference." This simply means the rate at which "s ociety" discounts future consumption flows to theirpresent value. If we take the rate that the average saver uses to dis count future consumption as our measure of the soci al rate of time preference, then the real rate of return on long-te rm government debt may provide a fair approximation . Over the last thirty years, this rate has averaged around 3 perce nt in real terms on a pre-tax basis. For example, t he yield on 10- year Treasury notes has averaged 8.1 percent since 1973 while the average annual rate of change in the CPI over this period has been 5.0 percent, implying a real 10-yea r rate of 3.1 percent.
For regulatory analysis, you should provide estimat es of net benefits using both 3 percent and 7 perce nt. An example of this approach is EPA's analysis of its 1998 rule setting both effluent limits for wastewater discha rges and air toxic emission limits for pulp and paper mills. In this a nalysis, EPA developed its present-value estimates using real discount rates of 3 and 7 percent applied to benefi t and cost streams that extended forward for 30 yea rs. You should present a similar analysis in your own work.
In some instances, if there is reason to expect tha t the regulation will cause resources to be realloc ated away from private investment in the corporate sector, then th e opportunity cost may lie outside the range of 3 t o 7 percent. For example, the average real rate of return on corpora te capital in the United States was approximately 1 0 percent in the 1990s, returning to the same level observed in the 1950s and 1960s. If you are uncertain about the nat ure of the opportunity cost, then you should present benefit a nd cost estimates using a higher discount rate as afurther sensitivity analysis as well as using the 3 and 7 p ercent rates.

3. Time Preference for Health-Related Benefits and Costs

When future benefits or costs are health-related, s ome have questioned whether discounting is appropri ate, since the rationale for discounting money may not appear to a pply to health. It is true that lives saved today c annot be invested in a bank to save more lives in the future. But the resources that would have been used to save those lives can be invested to earn a higher payoff in future lives saved. People have been observed to prefer health gai ns that occur immediately to identical health gains that occur in the future. Also, if future health gains are not d iscounted while future costs are, then the following perverse result occur s: an attractive investment today in future health improvement can always be made more attractive by delaying the inve stment. For such reasons, there is a professional c onsensus that future health effects, including both benefits and costs, should be discounted at the same rate. This consensus applies to both BCA and CEA.
A common challenge in health-related analysis is to quantify the time lag between when a rule takes ef fect and when the resulting physical improvements in health statu s will be observed in the target population. In suc h situations, you must carefully consider the timing of health benefi ts before performing present-value calculations. Itis not reasonable to assume that all of the benefits of reducing chro nic diseases such as cancer and cardiovascular dise ase will occur immediately when the rule takes effect. For rules a ddressing traumatic injury, this lag period may be short. For chronic diseases it may take years or even decades for a ru le to induce its full beneficial effects in the tar get population.
When a delay period between exposure to a toxin and increased probability of disease is likely (a so-c alled latency period), a lag between exposure reduction and reduc ed probability of disease is also likely. This latt er period has sometimes been referred to as a "cessation lag," an d it may or may not be of the same duration as the latency period. As a general matter, cessation lags will only applyto populations with at least some high-level expos ure (e.g., before 

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- 4the rule takes effect). For populations with no suc h prior exposure, such as those born after the ruletakes effect, only

the latency period will be relevant.
Ideally, your exposure-risk model would allow calcu lation of reduced risk for each year following expo sure cessation, accounting for total cumulative exposure and age atthe time of exposure reduction. The present-value benefits estimate could then reflect an appropriate discountfactor for each year's risk reduction. Recent anal yses of the cancer benefits stemming from reduction in public exposure to radon in drinking water have adopted this appro ach. They were supported by formal risk-assessment models that all owed estimates of the timing of lung cancer inciden ce and mortality to vary in response to different radon ex posure levels. 22
In many cases, you will not have the benefit of suc h detailed risk assessment modeling. You will need to use your professional judgment as to the average cessation l ag for the chronic diseases affected by your rule. In situations where information exists on latency but not on cess ation lags, it may be reasonable to use latency as a proxy for the cessation lag, unless there is reason to believe th at the two are different. When the average lag time between exposures and disease is unknown, a range of plausi ble alternative values for the time lag should be u sed in your analysis.
4. Intergenerational Discounting
Special ethical considerations arise when comparing benefits and costs across generations. Although mo st people demonstrate time preference in their own consumptio n behavior, it may not be appropriate for society t o demonstrate a similar preference when deciding between the well-b eing of current and future generations. Future citi zens who are affected by such choices cannot take part in making them, and today's society must act with some consi deration of their interest.
One way to do this would be to follow the same disc ounting techniques described above and supplement t he analysis with an explicit discussion of the intergenerationa l concerns (how future generations will be affected by the regulatory decision). Policymakers would be provided with this additional information without changing the genera l approach to discounting.
Using the same discount rate across generations has the advantage of preventing time-inconsistency pro blems. For example, if one uses a lower discount rate for futu re generations, then the evaluation of a rule that has short-term costs and long-term benefits would become more favo rable merely by waiting a year to do the analysis. Further, using the same discount rate across generations is attrac tive from an ethical standpoint. If one expects fut ure generations to be better off, then giving them the advantage of a lower discount rate would in effect transfer resour ces from poorer people today to richer people tomorrow.
Some believe, however, that it is ethically impermi ssible to discount the utility of future generation s. That is, government should treat all generations equally. Ev en under this approach, it would still be correct t o discount future costs and consumption benefits generally (perhaps at a lower rate than for intragenerational analysis) , due to the expectation that future generations will be wealthi er and thus will value a marginal dollar of benefit s or costs by less than those alive today. Therefore, it is appropriat e to discount future benefits and costs relative to current benefits and costs, even if the welfare of future generations is not being discounted. Estimates of the appropriate discount rate appropriate in this case, from the 1990s, ranged fr om 1 to 3 percent per annum. 23
A second reason for discounting the benefits and co sts accruing to future generations at a lower rate is increased uncertainty about the appropriate value of the disc ount rate, the longer the horizon for the analysis. Private market rates provide a reliable reference for determining how society values time within a generation, but fo r extremely long time periods no comparable private rates exist. As explained by Martin Weitzman 24 , in the limit for the deep future, the 

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- 4properly averaged certainty-equivalent discount fac tor (i.e., 1/[1+r] t ) corresponds to the minimum discount rate having

any substantial positive probability. From today's perspective, the only relevant limiting scenario is the one with the lowest discount rate B all of the other states at t he far-distant time are relatively much less import ant because their expected present value is so severely reduced by th e power of compounding at a higher rate.
If your rule will have important intergenerational benefits or costs you might consider a further sens itivity analysis using a lower but positive discount rate in addition to c alculating net benefits using discount rates of 3 a nd 7 percent.

5. Time Preference for Non-Monetized Benefits and C osts
Differences in timing should be considered even forbenefits and costs that are not expressed in monet ary units, including health benefits. The timing differences c an be handled through discounting. EPA estimated co steffectiveness in its 1998 rule, "Control of Emissio ns from Nonroad Diesel Engines," by discounting bot h the monetary costs and the non-monetized emission reduction bene fits over the expected useful life of the engines a t the 7 percent real rate recommended in OMB Circular A-94.
Alternatively, it may be possible in some cases to avoid discounting non-monetized benefits. If the ex pected flow of benefits begins as soon as the cost is incurred and is expected to be constant over time, then annuali zing the cost stream is sufficient, and further discounting of be nefits is unnecessary. Such an analysis might produ ce an estimate of the annualized cost per ton of reduced emissions ofa pollutant.

6. The Internal Rate of Return

The internal rate of return is the discount rate th at sets the net present value of the discounted ben efits and costs equal to zero. The internal rate of return does notgenerally provide an acceptable decision criterion , and regulations with the highest internal rate of return are not ne cessarily the most beneficial. Nevertheless, it doe s provide useful information and for many it will offer a meaningful indication of regulation's impact. You should cons ider including the internal rate of return implied by your regulatory analysis along with other information about discoun ted net present values.
Other Key Considerations

1. Other Benefit and Cost Considerations
You should include these effects in your analysis a nd provide estimates of their monetary values when they are significant:
Private-sector compliance costs and savings; • Government administrative costs and savings; • Gains or losses in consumers' or producers' surplus es; • Discomfort or inconvenience costs and benefits; and • Gains or losses of time in work, leisure and/or com muting/travel settings. •

Estimates of benefits and costs should be based on credible changes in technology over time. For examp le, retrospective studies may provide evidence that "le arning" will likely reduce the cost of regulation i n future years. The weight you give to a study of past rates of cost savings resulting from innovation (including "learnin g curve" effects) should depend on both its timeliness and direct rel evance to the processes affected by the regulatory alternative under consideration. In addition, you should take into ac count cost-saving innovations that result from a sh ift to regulatory 

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- 4performance standards and incentive-based policies. On the other hand, significant costs may result fr om a slowing in

the rate of innovation or of adoption of new techno logy due to delays in the regulatory approval proce ss or the setting of more stringent standards for new facilities than existing ones. In some cases agencies are limited under statute to consider only technologies that have been demonstra ted to be feasible. In these situations, it may be useful to estimate costs and cost savings assuming a wider ra nge of technical possibilities.
When characterizing technology changes over time, y ou should assess the likely technology changes thatwould have occurred in the absence of the regulatory action (t echnology baseline). Technologies change over time in both reasonably functioning markets and imperfect market s. If you assume that technology will remain unchan ged in the absence of regulation when technology changes are l ikely, then your analysis will over-state both the benefits and costs attributable to the regulation.
Occasionally, cost savings or other forms of benefi ts accrue to parties affected by a rule who also be ar its costs. For example, a requirement that engine manufacturers re duce emissions from engines may lead to technologie s that improve fuel economy. These fuel savings will norma lly accrue to the engine purchasers, who also bear the costs of the technologies. There is no apparent market failu re with regard to the market value of fuel saved be cause one would expect that consumers would be willing to pay for i ncreased fuel economy that exceeded the cost of pro viding it. When these cost savings are substantial, and particularl y when you estimate them to be greater than the cos t associated with achieving them, you should examine and discuss why market forces would not accomplish these gains in the absence of regulation. As a general matter, any dir ect costs that are averted as a result of a regulat ory action should be monetized wherever possible and either added to the benefits or subtracted from the costs of that a lternative.
2. The Difference between Costs (or Benefits) and T ransfer Payments
Distinguishing between real costs and transfer paym ents is an important, but sometimes difficult, prob lem in cost estimation. Benefit and cost estimates should refle ct real resource use. Transfer payments are monetary payments from one group to another that do not affect total resources available to society. A regulation that r estricts the supply of a good, causing its price to rise, produces a trans fer from buyers to sellers. The net reduction in th e total surplus (consumer plus producer) is a real cost to society, but the transfer from buyers to sellers resulting from a higher price is not a real cost since the net reduction automati cally accounts for the transfer from buyers to sell ers. However, transfers from the United States to other nations should be included as costs, and transfers from other nat ions to the United States as benefits, as long as the analysis is conducted from the United States perspective.

You should not include transfers in the estimates o f the benefits and costs of a regulation. Instead, address them in a separate discussion of the regulation's distributio nal effects. Examples of transfer payments include the following:
Scarcity rents and monopoly profits • Insurance payments • Indirect taxes and subsidies • Treatment of Uncertainty
The precise consequences (benefits and costs) of re gulatory options are not always known for certain, but the probability of their occurrence can often be develo ped. The important uncertainties connected with you r regulatory decisions need to be analyzed and presented as partof the overall regulatory analysis. You should beg in your analysis of uncertainty at the earliest possible stage in de veloping your analysis. You should consider both th e statistical variability of key elements underlying the estimate s of benefits and costs (for example, the expected change in the distribution of automobile accidents that might res ult from a change in automobile safety standards) a nd the incomplete knowledge about the relevant relationshi ps (for example, the uncertain knowledge of how som e economic 

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- 4activities might affect future climate change). 25By assessing the sources of uncertainty and the way in which benefit

and cost estimates may be affected under plausible assumptions, you can shape your analysis to inform decision makers and the public about the effects and the unc ertainties of alternative regulatory actions.
The treatment of uncertainty must be guided by the same principles of full disclosure and transparencythat apply to other elements of your regulatory analysis. Your an alysis should be credible, objective, realistic, an d scientifically balanced. 26Any data and models that you use to analyze uncert ainty should be fully identified. You should also discuss the quality of the available data used. Inf erences and assumptions used in your analysis shoul d be identified, and your analytical choices should be explicitly ev aluated and adequately justified. In your presentat ion, you should delineate the strengths of your analysis along with any uncertainties about its conclusions. Your pres entation should also explain how your analytical choices have affec ted your results.
In some cases, the level of scientific uncertainty may be so large that you can only present discrete alternative scenarios without assessing the relative likelihood of each scenario quantitatively. For instance, in assessing the potential outcomes of an environmental effect, ther e may be a limited number of scientific studies wit h strongly divergent results. In such cases, you might presentresults from a range of plausible scenarios, toget her with any available information that might help in qualitativ ely determining which scenario is most likely to oc cur.
When uncertainty has significant effects on the fin al conclusion about net benefits, your agency shoul d consider additional research prior to rulemaking. The costs of being wrong may outweigh the benefits of a faste r decision. This is true especially for cases with irreversible or l arge upfront investments. If your agency decides to proceed with rulemaking, you should explain why the costs of dev eloping additional information—including any harm f rom delay in public protection—exceed the value of that informat ion.
For example, when the uncertainty is due to a lack of data, you might consider deferring the decision, as an explicit regulatory alternative, pending further study to ob tain sufficient data. Delaying a decision will also have costs, as will further efforts at data gathering and analysis. You will need to weigh the benefits of delay against t hese costs in making your decision. Formal tools for assessing th e value of additional information are now well deve loped in the applied decision sciences and can be used to help r esolve this type of complex regulatory question.
"Real options" methods have also formalized the val uation of the added flexibility inherent in delayin g a decision. As long as taking time will lower uncertainty, either passively or actively through an investment in info rmation gathering, and some costs are irreversible, such as the potent ial costs of a sunk investment, a benefit can be as signed to the option to delay a decision. That benefit should be considered a cost of taking immediate action versus the alternative of delaying that action pending more information. H owever, the burdens of delay—including any harm to public health, safety, and the environment—need to be analyzed car efully.
1. Quantitative Analysis of Uncertainty
Examples of quantitative analysis, broadly defined, would include formal estimates of the probabilitie s of environmental damage to soil or water, the possible loss of habit at, or risks to endangered species as well as proba bilities of harm to human health and safety. There are also uncertainti es associated with estimates of economic benefits a nd costs, such as the cost savings associated with increased energ y efficiency. Thus, your analysis should include tw o fundamental components: a quantitative analysis characterizing the probabilities of the relevant outcomes and an a ssignment of economic value to the projected outcomes. It is ess ential that both parts be conceptually consistent. In particular, the quantitative analysis should be conducted in a way that permits it to be applied within a more general analytical framework, such as benefit-cost analysis. Similarly , the general framework needs to be flexible enough to incorporate the quantitative analysis without oversimplifying t he results. For example, you should address explici tly the implications for benefits and costs of any probability distribut ions developed in your analysis. 

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- 4As with other elements of regulatory analysis, you will need to balance thoroughness with the practica l limits on your

analytical capabilities. Your analysis does not hav e to be exhaustive, nor is it necessary to evaluate each alternative at every step. Attention should be devoted to first re solving or studying the uncertainties that have the largest potential effect on decision making. Many times these will be the largest sources of uncertainties. In the absen ce of adequate data, you will need to make assumptions. These shou ld be clearly identified and consistent with the re levant science. Your analysis should provide sufficient information for decision makers to grasp the degree of scienti fic uncertainty and the robustness of estimated probabilities, benefits , and costs to changes in key assumptions.
For major rules involving annual economic effects o f $1 billion or more, you should present a formal q uantitative analysis of the relevant uncertainties about benefi ts and costs. In other words, you should try to pro vide some estimate of the probability distribution of regulatory benef its and costs. In summarizing the probability distr ibutions, you should provide some estimates of the central tendency (e.g ., mean and median) along with any other informatio n you think will be useful such as ranges, variances, specified low-end and high-end percentile estimates, and oth er characteristics of the distribution.
Your estimates cannot be more precise than their mo st uncertain component. Thus, your analysis should report estimates in a way that reflects the degree of unce rtainty and not create a false sense of precision. Worst-case or conservative analyses are not usually adequate beca use they do not convey the complete probability dis tribution of outcomes, and they do not permit calculation of an expected value of net benefits. In many health and safety rules, economists conducting benefit-cost analyses must re ly on formal risk assessments that address a variet y of risk management questions such as the baseline risk for the affected population, the safe level of exposure or, the amount of risk to be reduced by various interventions. Bec ause the answers to some of these questions are dir ectly used in benefits analyses, the risk assessment methodology must allow for the determination of expected benefi ts in order to be comparable to expected costs. This means that co nservative assumptions and defaults (whether motivated by science policy or by precautionary instincts), will be incompatible with benefit analyses as they will result in benefit estimates that exceed the expected value. Whenever it is possible to characterize quantitatively the p robability distributions, some estimates of expected value (e. g., mean and median) must be provided in addition t o ranges, variances, specified low-end and high-end percentil e estimates, and other characteristics of the distr ibution.
Whenever possible, you should use appropriate stati stical techniques to determine a probability distri bution of the relevant outcomes. For rules that exceed the $1 bil lion annual threshold, a formal quantitative analys is of uncertainty is required. For rules with annual benefits and/or cos ts in the range from 100 million to $1 billion, you should seek to use more rigorous approaches with higher consequence ru les. This is especially the case where net benefits are close to zero. More rigorous uncertainty analysis may not be necessary for rules in this category if simpler te chniques are sufficient to show robustness. You may consider the following analytical approaches that entail increa sing levels of complexity:
Disclose qualitatively the main uncertainties in ea ch important input to the calculation of benefits a nd costs. These disclosures should address the uncertainties in the data as well as in the analytical results. H owever, major rules above the $1 billion annual threshold r equire a formal treatment. •

Use a numerical sensitivity analysis to examine howthe results of your analysis vary with plausible c hanges in assumptions, choices of input data, and alternativeanalytical approaches. Sensitivity analysis is esp ecially valuable when the information is lacking to carry o ut a formal probabilistic simulation. Sensitivity a nalysis can be used to find "switch points" -- critical parameter values at which estimated net benefits change sign or the low cost alternative switches. Sensitivity analysis usu ally proceeds by changing one variable or assumptio n at a time, but it can also be done by varying a combinat ion of variables simultaneously to learn more aboutthe robustness of your results to widespread changes. A gain, however, major rules above the $1 billion ann ual threshold require a formal treatment. • 

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- 4Apply a formal probabilistic analysis of the releva nt uncertainties B possibly using simulation models and/or

expert judgment as revealed, for example, through D elphi methods. 28Such a formal analytical approach is appropriate for complex rules where there are large , multiple uncertainties whose analysis raises tech nical challenges, or where the effects cascade; it is req uired for rules that exceed the $1 billion annual t hreshold. For example, in the analysis of regulations addressing air pollution, there is uncertainty about the effects of the rule on future emissions, uncertainty about how the chan ge in emissions will affect air quality, uncertainty about how changes in air quality will affect health, and fina lly uncertainty about the economic and social value of the change in health outcomes. In formal probabilistic assessments, expert solicitation is a useful way to fill key gaps in your ability to assess uncertainty. 29In general, experts can be used to quantify the pr obability distributions of key parameters and relationships. These solicitations, combined with other sources ofdata, can be combined in Monte Carlo simulations to derive a probability distribution of benefits and costs. You should pay attention to correlated inputs. Often times, th e standard defaults in Monte Carlo and other simila r simulation packages assume independence across distributions. Failing to correctly account for correlated distrib utions of inputs can cause the resultant output uncertainty i ntervals to be too large, although in many cases th e overall effect is ambiguous. You should make a special effo rt to portray the probabilistic results—in graphs a nd/or tables—clearly and meaningfully. •

New methods may become available in the future. Thi s document is not intended to discourage or inhibittheir use, but rather to encourage and stimulate their development

.
2. Economic Values of Uncertain Outcomes
In developing benefit and cost estimates, you may f ind that there are probability distributions of val ues as well for each of the outcomes. Where this is the case, you will n eed to combine these probability distributions to p rovide estimated benefits and costs.
Where there is a distribution of outcomes, you will often find it useful to emphasize summary statisti cs or figures that can be readily understood and compared to achieve t he broadest public understanding of your findings. It is a common practice to compare the "best estimates" of both be nefits and costs with those of competing alternativ es. These "best estimates" are usually the average or the expected value of benefits and costs. Emphasis on these expe cted values is appropriate as long as society is "risk neutral" wi th respect to the regulatory alternatives. While th is may not always be the case, you should in general assume "risk neutra lity" in your analysis. If you adopt a different as sumption on risk preference, you should explain your reasons for doi ng so.
3. Alternative Assumptions
If benefit or cost estimates depend heavily on cert ain assumptions, you should make those assumptions explicit and carry out sensitivity analyses using plausible alte rnative assumptions. If the value of net benefits c hanges from positive to negative (or vice versa) or if the relative rank ing of regulatory options changes with alternative plausible assumptions, you should conduct further analysis to determine which of the alternative assumptions is more appropriate. Because different estimation methods m ay have hidden assumptions, you should analyze esti mation methods carefully to make any hidden assumptions ex plicit.
F. Specialized Analytical Requirements In preparing analytical support for your rulemaking , you should be aware that there are a number of an alytic requirements imposed by law and Executive Order. In addition to the regulatory analysis requirements o f Executive Order 12866, you should also consider whether your rule will need specialized analysis of any of the f ollowing issues.
Impact on Small Businesses and Other Small Entities 

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- 4Under the Regulatory Flexibility Act (5 U.S.C. chap ter 6), agencies must prepare a proposed and final "regulatory

flexibility analysis" (RFA) if the rulemaking could "have a significant impact on a substantial numberof small entities." You should consider posting your RFA on the interne t so the public can review your findings.
Your agency should have guidelines on how to prepar e an RFA and you are encouraged to consult with the Chief Counsel for Advocacy of the Small Business Administ ration on expectations concerning what is an adequa te RFA. Executive Order 13272 (67 FR 53461, August 16, 2002 ) requires you to notify the Chief Counsel for Advo cacy of any draft rules that might have a significant economic impact on a substantial number of small entities. E xecutive Order 13272 also directs agencies to give every appropria te consideration to any comments provided by the Ad vocacy Office. Under SBREFA, EPA and OSHA are required to consult with small business prior to developing a p roposed rule that would have a significant effect on small businesses. OMB encourages other agencies to do so as well.
Analysis of Unfunded Mandates
Under the Unfunded Mandates Act (2 U.S.C. 1532), yo u must prepare a written statement about benefits a nd costs prior to issuing a proposed or final rule (for whic h your agency published a proposed rule) that may r esult in aggregate expenditure by State, local, and tribal governments , or by the private sector, of $100,000,000 or more in any one year (adjusted annually for inflation). Your analytical requirements under Executive Order 12866 are simila r to the analytical requirements under this Act, and thus the same anal ysis may permit you to comply with both analytical requirements.
Information Collection, Paperwork, and Recordkeeping Burdens
Under the Paperwork Reduction Act (44 U.S.C. chapte r 35), you will need to consider whether your rulem aking (or other actions) will create any additional informati on collection, paperwork or recordkeeping burdens. These burdens are permissible only if you can justify the practic al utility of the information for the implementatio n of your rule. OMB approval will be required of any new requirements f or a collection of information imposed on 10 or mor e persons and a valid OMB control number must be obtained for any c overed paperwork. Your agency's CIO should be able to assist you in complying with the Paperwork Reduction Act.
Information Quality Guidelines
Under the Information Quality Law, agency guideline s, in conformance with the OMB government-wide guid elines (67 FR 8452, February 22, 2002), have established basicquality performance goals for all information diss eminated by agencies, including information disseminated in sup port of proposed and final rules. The data and anal ysis that you use to support your rule must meet these agency and OMB quality standards. Your agency's CIO should be able to assist you in assessing information quality. The St atistical and Science Policy Branch of OMB's Office of Information and Regulatory Affairs can provide you assistance. This circular defines OMB's minimum quality standar ds for regulatory analysis.
Environmental Impact Statements
The National Environmental Policy Act (42 U.S.C. 43 21-4347) and related statutes and executive orders require agencies to consider the environmental impacts of a gency decisions, including rulemakings. An environm ental impact statement must be prepared for "major Federal actio ns significantly affecting the quality of the human environment." You must complete NEPA documentation before issuing a final rule. The White House Council on Environme ntal Quality has issued regulations (40 C.F.R. 1500-1508 ) and associated guidance for implementation of NEP A, available through CEQ's website ( http://www.whitehouse.gov/ceq/).
Impacts on Children 

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- 4Under Executive Order 13045, "Protection of Childre n from Environmental Health Risks and Safety Risks, " each

agency must, with respect to its rules, "to the ext ent permitted by law and appropriate, and consisten t with the agency's mission," "address disproportionate risks to children that result from environmental health r isks or safety risks." For any substantive rulemaking action that "is likely to result in" an economically significan t rule that concerns "an environmental health risk or safety risk that a n agency has reason to believe may disproportionate ly affect children," the agency must provide OMB/OIRA "an eva luation of the environmental health or safety effects of the planned regulation on children," as well as "an exp lanation of why the planned regulation is preferabl e to other potentially and reasonably feasible alternatives co nsidered by the agency."
Energy Impacts
Under Executive Order 13211 (66 FR 28355, May 22, 2 001), agencies are required to prepare and submit t o OMB a Statement of Energy Effects for significant energy actions, to the extent permitted by law. This State ment is to include a detailed statement of "any adverse effects on ene rgy supply, distribution, or use (including a short fall in supply, price increases, and increased use of foreign supplies)" for the action and reasonable alternatives and thei r effects. You need to publish the Statement or a summary in the r elated NPRM and final rule. For further guidance, s ee OMB Memorandum 01-27 ("Guidance on Implementing Executi ve Order 13211", July 13, 2001), available on OMB's website.
G. Accounting Statement You need to provide an accounting statement with ta bles reporting benefit and cost estimates for each major final rule for your agency. You should use the guidance outlin ed above to report these estimates. We have include d a suggested format for your consideration.
Categories of Benefits and Costs
To the extent feasible, you should quantify all pot ential incremental benefits and costs. You should r eport benefit and cost estimates within the following three categorie s: monetized quantified, but not monetized; and qua litative, but not quantified or monetized.
These categories are mutually exclusive and exhaust ive. Throughout the process of listing preliminary estimates of benefits and costs, agencies should avoid double-co unting. This problem may arise if more than one wayexists to express the same change in social welfare.
Quantifying and Monetizing Benefits and Costs
You should develop quantitative estimates and conve rt them to dollar amounts if possible. In many case s, quantified estimates are readily convertible, with a little ef fort, into dollar equivalents.

Qualitative Benefits and Costs
You should categorize or rank the qualitative effec ts in terms of their importance (e.g., certainty, l ikely magnitude, and reversibility). You should distinguish the effects that are likely to be significant enough to warrantserious consideration by decision makers from those that are likely to be minor.

Treatment of Benefits and Costs over Time
You should present undiscounted streams of benefit and cost estimates (monetized and net) for each yea r of the analytic time horizon. You should present annualize d benefits and costs using real discount rates of 3 and 7 percent. 

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- 4The stream of annualized estimates should begin in the year in which the final rule will begin to have effects, even if

the rule does not take effect immediately. Please r eport all monetized effects in 2001 dollars. You sh ould convert dollars expressed in different years to 2001 dollar s using the GDP deflator.
Treatment of Risk and Uncertainty
You should provide expected-value estimates as well as distributions about the estimates, where such i nformation exists. When you provide only upper and lower bound s (in addition to best estimates), you should, if p ossible, use the 95 and 5 percent confidence bounds. Although we enc ourage you to develop estimates that capture the 5 of plausible outcomes for a particular alternative, detailed rep orting of such distributions is not required, but s hould be available upon request.
The principles of full disclosure and transparency apply to the treatment of uncertainty. Where there is significant uncertainty and the resulting inferences and/or ass umptions have a critical effect on the benefit and cost estimates, you should describe the benefits and costs under pl ausible alternative assumptions. You may add footno tes to the table as needed to provide documentation and refere nces, or to express important warnings.
In a previous section, we identified some of the is sues associated with developing estimates of the va lue of reductions in premature mortality risk. Based on this discussi on, you should present alternative primary estimate s where you use different estimates for valuing reductions in prema ture mortality risk.

Precision of Estimates
Reported estimates should reflect, to the extent fe asible, the precision in the analysis. For example, an estimate of $220 million implies rounding to the nearest $10 mi llion and thus a precision of +/-$5 million; simila rly, an estimate of $222 million implies rounding to the nearest $1 mil lion and thus, a precision of +/-$0.5 million.
Separate Reporting of Transfers
You should report transfers separately and avoid th e misclassification of transfer payments as benefit s or costs. Transfers occur when wealth or income is redistribu ted without any direct change in aggregate social w elfare. To the extent that regulatory outputs reflect transfers ra ther than net welfare gains to society, you should identify them as transfers rather than benefits or costs. You should also distinguish transfers caused by Federal budge t actions -- such as those stemming from a rule affecting Social Secu rity payments -- from those that involve transfers between nongovernmental parties -- such as monopoly rents a ru le may confer on a private party. You should use as many categories as necessary to describe the major redis tributive effects of a regulatory action. If transf ers have significant efficiency effects in addition to distributional ef fects, you should report them.
Effects on State, Local, and Tribal Governments, Small Business, Wages and Economic Growth
You need to identity the portions of benefits, cost s, and transfers received by State, local, and trib al governments. To the extent feasible, you also should identify the e ffects of the rule or program on small businesses, wages, and economic growth. Note that rules with annual costs that are less than one billion dollars are likely t o have a minimal effect on economic growth.

Click here to access the form (93 kb) 

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- 4H. Effective Date

The effective date of this Circular is January 1, 2 004 for regulatory analyses received by OMB in supp ort of proposed rules, and January 1, 2005 for regulatory analyses received by OMB in support of final rules. In otherwords, this Circular applies to the regulatory analyses for dra ft proposed rules that are formally submitted to OI RA after December 31, 2003, and for draft final rules that are formal ly submitted to OIRA after December 31, 2004. (Howe ver, if the draft proposed rule is subject to the Circular, then the draft final rule will also be subject to the Circul ar, even if it is submitted prior to January 1, 2005.) To the extent practicable, agencies should comply earlier than th ese effective dates. Agencies may, on a case-by-case basis, seek a waiver from OMB if these effective dates are impr actical.

1 We use the term "proposed" to refer to any regulat ory actions under consideration regardless of the s tage of the regulatory process.

2See Mishan EJ (1994), Cost-Benefit Analysis , fourth edition, Routledge, New York.

3See Coase RH (1960), Journal of Law and Economics , 3, 1-44.

4Mishan EJ (1994), Cost-Benefit Analysis , fourth edition, Routledge, New York.

5For a full discussion of CEA, see Gold, ML, Siegel , JE, Russell, LB, and Weinstein, MC (1996), Cost Effectiveness in Health and Medicine: The Report of the Panel on Cos t-Effectiveness in Health and Medicine , Oxford University Press, New York.

6Gold ML, Siegel JE, Russell LB, and Weinstein MC ( 1996), Cost Effectiveness in Health and Medicine: The Repo rt of the Panel on Cost-Effectiveness in Health and Medicine , Oxford University Press, New York, pp. 284-285.

7Russell LB and Sisk JE (2000), "Modeling Age Diffe rences in Cost Effectiveness Analysis", International Journal of Technology Assessment in Health Care , 16(4), 1158-1167.

8Pliskin JS, Shepard DS, and Weinstein MC (1980), " Utility Functions for Life Years and Health Status, " Operations Research , 28(1), 206-224.

9Hammitt JK (2002), "QALYs Versus WTP," Risk Analysis , 22(5), pp. 985-1002.

10For the least stringent alternative, you should es timate the incremental benefits and costs relative to the baseline. Thus, for this alternative, the incremental effects would be the same as the corresponding totals. Foreach alternative that is more stringent than the least stringent alt ernative, you should estimate the incremental benef its and costs relative to the closest less-stringent alternative.

11 See Hanemann WM (1991), American Economic Review , 81(3), 635-647.

12See Kahneman D, Knetsch JL, and Thaler RH (1991), "Anomalies: The Endowment Effect, Loss Aversion, an d Status Quo Bias," Journal of Economic Perspectives 3(1), 192-206. 

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- 413Consumer surplus is the difference between what a consumer pays for a unit of a good and the maximum amount

the consumer would be willing to pay for that unit. It is measured by the area between the price and t he demand curve for that unit. Producer surplus is the difference b etween the amount a producer is paid for a unit of a good and the minimum amount the producer would accept to supply that unit. It is measured by the area between the p rice and the supply curve for that unit.

14See McConnell KE (1997), Journal of Environmental Economics and Management, 32, 22-37.

15See Loomis JB (1992), Water Resources Research , 28(3), 701-705 and Kirchoff, S, Colby, BG, and La France, JT (1997), Journal of Environmental Economics and Management, 33, 75-93.

16Mishan EJ (1994), Cost-Benefit Analysis , fourth edition, Routledge, New York.

17See Viscusi WK and Aldy JE, Journal of Risk and Uncertaint y (forthcoming) and Mrozek JR and Taylor LO (2002), Journal of Policy Analysis and Management, 21(2), 253-270.

18Distinctions between "voluntary" and "involuntary" should be treated with care. Risks are best consid ered to fall within a continuum from "voluntary" to "involuntary " with very few risks at either end of this range. These terms are also related to differences in the cost of avoiding risks.

19Graham JD (2003), Memorandum to the President’s Ma nagement Council, Benefit-Cost Methods and Lifesavi ng Rules. This memorandum can be found at http://www.whitehouse.gov/omb/inforeg/pmc_benefit_c ost_memo.pdf

20Office of Information and Regulatory Affairs, OMB, Memorandum to the President’s Management Council, ibid.

21 For more information, see Dockins C., Jenkins RR, Owens N, Simon NB, and Wiggins LB (2002), Risk Analysis , 22 (2), 335-346.

22Committee on Risk Assessment of Exposure to Radon in Drinking Water, Board on Radiation Effects Resea rch, Commission on Life Sciences (1996), Risk Assessment of Radon in Drinking Water , National Research Council, National Academy Press, Washington, DC.

23Portney PR and Weyant JP, eds. (1999), Discounting and Intergenerational Equity, Resources for the Future, Washington, DC.

24Weitzman ML In Portney PR and Weyant JP, eds. (199 9), Discounting and Intergenerational Equity, Resources for the Future, Washington, DC.

25In some contexts, the word "variability" is used a s a synonym for statistical variation that can be d escribed by a theoretically valid distribution function, whereas "uncertainty" refers to a more fundamental lack of knowledge. Throughout this discussion, we use the term "uncert ainty" to refer to both concepts.

26When disseminating information, agencies should fo llow their own information quality guidelines, issu ed in conformance with the OMB government-wide guidelines (67 FR 8452, February 22, 2002). 

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- 427Clemen RT (1996), Making Hard Decisions: An Introduction to Decision Analysis , second edition, Duxbury Press,

Pacific Grove.

28The purpose of Delphi methods is to generate suita ble information for decision making by eliciting ex pect judgment. The elicitation is conducted through a survey proce ss which eliminates the interactions between expert s. See Morgan MG and Henrion M (1990), Uncertainty: A Guide to Dealing with Uncertainty in Quantitative Riskand Policy Analysis , Cambridge University Press.

29Cooke RM (1991), Experts in Uncertainty: Opinion and Subjective Prob ability in Science , Oxford University Press.

30The Regulatory Flexibility Act (5 U.S.C. 603(c), 6 04).

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